Farm Ireland
Independent.ie

Monday 25 March 2019

Mike Brady: Why a business plan will give your farm a better chance of flourishing

 

Agricultural consultant, Mike Brady.
Agricultural consultant, Mike Brady.
File photo
Mike Brady

Mike Brady

The very mention of terms like 'cashflow', 'financial projections' or 'farm business plans' tends to immediately turn off most farmers.

This is understandable, as many farmers like the outdoors and the practical side of agriculture, while the thought of adding up reams of figures and working out calculations can be off-putting.

So, should farmers engage a professional to do the figures - or not bother and let the last hour be the hardest?

The answer to this question, of course, varies from farmer to farmer.

Some farmers practice the same system of production year-in, year-out, so from experience they have a good gut feeling for the ebb and flow of their bank current account throughout the year.

These farmers should certainly be able to get away without doing any budgeting or projections for the weeks, months or years ahead.

This was very common amongst dairy farmers in the milk quota era.

Many dairy farmers are presently expanding their enterprises. Planning ahead is critical for these farmers, otherwise it's like driving at night without the lights on.

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In my experience, planning ahead minimises unexpected surprises and brings peace of mind to the farmer.

The following are four simple steps to better cashflow management and planning:

1. Information gathering

In simple terms, a farm business plan attempts to project the next set of financial accounts for the farm business.

Cashflow is effectively the balance in the current account in that period.

Today, it is much easier to gather the information required to do a business plan. The following is the basic information a farmer will need:

  • Financial accounts for the last three years
  • ICBF Herd Plus access codes for stock numbers and milk data
  • Bank and finance lease account balances, repayment schedules and interest rates
  • List of creditors and debtors
  • Any other relevant information, i.e. off-farm income, tax liability, etc.

2. Correct mindset

Once the information is to hand, one must get in the correct frame of mind to prepare the farm business plan for the year ahead. There are three options:

  • Optimistic
  • Pessimistic
  • Realistic

There is absolutely no point being wildly optimistic - this will damage credibility with your bank and erode your own confidence in executing your plan.

It is a useful exercise to do a sensitivity analysis on your farm business plan, i.e. the pessimistic option, just to see how the business would cope in a difficult year, e.g. at a milk price of 22 cent per litre.

The correct way to prepare your farm business plan is to be realistic with your forecast of income and expenditure.

3. Farm business plan detail

The farm business plan must include the following pages:

  • Basic assumptions
  • Balance sheet
  • Income and expenditure account
  • Source and application of funds
  • Cashflow

When the farm business plan is complete, the key performance indicators (KPIs) should be identified.

These will drive the business - e.g. net profit, surplus cash, tonnes of grass grown, kg of milk solids sold, etc.

4. Monitoring

To get most benefit from a farm business plan, the KPIs should be monitored.

This should occur at least once a year when the financial accounts and technical data are compared to last year's farm business plan.

Preferably, monitoring should be done on a more regular basis, such as quarterly or monthly.

Preparing management accounts on a monthly basis is a time-consuming task for most farmers; in general, it is easier to employ a bookkeeper with the aid of modern financial software to collate and input the data.

The farmer's job is to make management decisions on the data, not burn the midnight oil inputting information to an accounts package.

If farmers get into a regular routine of gathering, preparing and monitoring key financial and technical data on their farm businesses, they become more knowledgeable on the main drivers of profit in their business.

This gives them an edge over their peers, allowing them to confidently make the correct management decisions.

Farm business planning may be unexciting and boring to many farmers, but those who meticulously plan have more stable businesses and a better chance of growing and flourishing into the future.

Mike Brady is managing director at Brady Group agricultural consultants & land agents; email: mike@bradygroup.ie

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