20th May, 2019
As the period for setting farm budgets comes to a close, you’ll want to make certain your agribusiness clients have the best plans in place for their needs, writes Paul Buchanan.
By now you’ll be coming into the end of budgeting season for your farming clients.
Despite the importance of having robust budgeting processes in place, it’s not always easy to convince clients to do so. But keep pushing, as there has never been a more critical time for your services.
As capital gains from farmland are no longer a given, with prices even easing back in some sectors, banks are putting more emphasis on a farming business’s ability to repay principal.
Banks themselves are facing pressure, with their capital requirements under review by the Reserve Bank and some big increases being looked at. The shake up has also included the Reserve Bank revoking ANZ NZ’s accreditation to model its own capital requirements due to ‘persistent failure’ in its controls and attestation. This will put further strain on access to credit in the rural sector.
The spotlight will be on proving good cash flow and overall viability of any farming business year-on-year in order to minimise the risk of having any hard conversations with the banker.
To do this, clients need to have a realistic budget where the assumptions are independently tested by their accountant or farm consultant.
Assuming you can get a good level of engagement, here are 10 rules to keep in mind when preparing a robust farm budget.
It’s critical that your budgeting tools are easy to use and understand for all parties.
They also need to be collaborative, with information available to be shared easily with those involved in the budgeting process and key farm decision makers.
While excel spreadsheets are better than an envelope, they can be overly complex and time consuming. MYOB Essentials has a quick, easy-to-use budgeting tool, which can create multiple budgets in short order.
Start with last year’s numbers and ask yourself how realistic they are. You can check back for a three-year average to highlight any outliers. Then ask yourself what has changed going into next season.
To get buy-in, the budget needs to have a broad consensus of acceptance from key stakeholders.
Clearly outlining the assumptions used and having a level of agreement around it will prove crucial when avoiding a lack of budgetary ownership from the client.
Avoid budgeting to show certain results to suit things such as bank convenants or family disputes.
Also remember the farmer must live with the budget and it needs to consider their personal as well as business circumstances.
Compare budget numbers to industry benchmarks and, if your clients’ results are different, make sure to understand why and dig into those reasons to get certainty they’re valid.
Speak up if the budget is showing a loss or unfavourable return.
A hard conversation now might mean a chance to reverse things by making tough decisions ahead of time.
Project out beyond the next two years.
Often, a year one budget looks poor on its own, but better when looked at in consideration of year two and beyond.
The client is reponsible for actual results and you need to be able to hold them to account.
Here’s a common conversation:
Advisor: “Your Animal Health is high.”
Client: “That’s because it’s miscoded – some should be feed.”
Advisor: “Well, your Feed is high too…”
Having regular catch ups and comparing budgets to actuals during the year will help with this.
Stress test the business by playing with ‘what if’ scenarios.
For example, how would the budget look if the milk pay-out was to drop to $X.
If a plausible scenario creates serious problems, then create contingency plans for getting through and check whether the bank will support these.
Farming is changing in so many areas: regulation, technology, consumer preferences and much more beyond. It’s your job to try to at least consider how these things might impact the longer-term viability of the farming operation and what contingencies are needed now to future proof the business.
Considering things such as investing in capital like irrigation for areas becoming drier, diversification of farm income with off-farm investments, or developing new revenue streams for the core business are all examples of things that should be front of mind.