Friday, July 1, 2022

Keeping track of the cash

We often talk about what farmers can and can’t control such as the weather, exchange rates, payout and production. However, farm expenses are certainly under a farmer’s control and have a real bearing on profitability. The greatest driver of profit on New Zealand dairy farms is cost control – the amount of your income you manage to keep. Dairy farming has plenty of challenges and after a busy season the reward should be hard-earned cash. To maximise the left over cash a business manager must exert tight financial control.

People who maximise their profits:

  • set a budget with a cash surplus target
  • update their budget as the season unfolds and actuals are recorded
  • use this information for decision making by altering their management plan to achieve their surplus target.

The most effective way to manage this is through the use of a good old-fashioned cash flow budget which helps keep track of your money on a monthly basis and provide the critical information you need to allow you to adjust your plan and achieve profit targets.

Having a budget that can be adjusted during the season, when payout changes or when feed costs change for instance, will provide clarity around what can be achieved. A cash flow budget will reduce surprises and allow you to plan your cash flow with your banker.

Farmers should set themselves financial targets for the season, much like production targets.

What do you need your business to provide in order to meet your goals? Set a cash surplus target then keep that in mind while you’re budgeting. What realistic actions do you need to take to make it work? Don’t depend on payouts to control how much cash your business generates.

Economic conditions are favourable and indicate next season’s milk price could be higher than 2012/13, depending on the exchange rate. Budget for the coming season and be ready to capitalise on any increases in milk price.

Profitability, not production, should be a focus for the business, and the best indicator of profitability is average cost of production.

Budgeting helps you take stock of your costs and plan how to improve efficiency of milk production.

Financial control is especially important for those starting their careers as business owners, those that want to grow their business and highly leveraged businesses.

DairyNZ have budgeting templates online at www.dairynz.co.nz and run workshops for farmers who want practical help putting together a budget for the 2013/14 season. Over two days farmers will have a chance to develop a working cash flow budget for their farm, letting them start the season with confidence and a plan for the business.

Over 300 farmers have attended the workshops over the past two years, with many of them saying afterwards that they feel more confident in their budgeting skills and better equipped to use the budget to make decisions.

Decision-making is critical on the farm and having access to information to help make those decisions is invaluable. If you understand your current financial position, if you have a plan for the coming season and perhaps the next few years, then you have equipped yourself to make good farm business decisions.

Keep the cash to ensure you reach your farm and family goals.

These two day workshops give farmers the resources and opportunity to build their own cashflow budget for 2013/14. For more information and to register for a workshop go to dairynz.co.nz/cashflow. 

Angie Fisher is a DairyNZ economist.

Total
0
Shares
More articles on this topic