23 August 2002

KNOWWHEREYOUREGOING ORLOOKOUT

COMING back to run the family farming business after the death of her father nine years ago, it never occurred to Anna Moore that she could tackle the task without a budget.

Mrs Moore, in partnership at Red House Farm, Little Yeldham, near Halstead, Essex, with her mother and sister, had run her own business outside farming for 17 years and gave herself three years to see if she could turn the farm around and reduce the massive inherited overdraft.

"At that time I didnt have any practical experience, but had always had a huge interest in the farm, which had been allowed to drift to some extent.

"We had to sit down and see where it was going wrong and budget for every penny, because there was no question of any other capital being brought in. I went in headfirst, supported by lots of kind help and advice from neighbouring farmers."

Cultivations, machinery repair costs and a rotation that ran to three wheats were highlighted as the main drags on financial performance. Budgets helped identify that and to show what changes to rotations and other policies would mean financially.

Heavy labour costs have been reduced through retirement and will reduce further after this harvest. Machinery repairs were tackled by taking on a part-time employee, who is an excellent mechanic, and replacing kit only with second-hand buys, with one exception. Min-till is now the policy on around one-third of the farm, cutting cultivation costs.

With a financial year-end in June, Mrs Moore begins her budget for the 222ha (550-acre) business in May. She has no professional help, apart from her one-day-a-week farm secretary.

Looking at the previous year for problems or successes is part of the process. "You have to look at the end of the year to see how you could do better, where it is not working. Then decide what you can afford per acre and where you will spend it.

"If you monitor your cash flow every month it is actually quite enjoyable, seeing whether you are on budget. After a while you see patterns and can identify where something has cost too much."

A budget means ideas can be changed from year to year with an informed basis for decisions, "I dont know how anybody manages without one."

ACCURATERECORDSARETHEBASE

ALTHOUGH annual budgets have been done for 15 years at Windolphs Farm, Stansfield, near Sudbury, Suffolk, recent structural changes have made them even more important.

As well as taking on contract land, Jonathan Slater has merged his machinery and labour with Andrew Horsley, of Hill Farm, Barnardiston, near Haverhill.

Their respective businesses maintain their own identity, but inputs are centrally purchased for the 607ha (1500 acres) of combinable crops and allocated to fields, with crop yields monitored and recorded on the same basis. The arrangement is now in its second harvest.

"We couldnt run the system without budgeting and accurate recording," he says. "Keeping accurate records is something I have always done, but it becomes even more important when you are farming for other people too. Everything is up to date so we know where we are and we know if its going pear shaped."

The budgeting process becomes easier with each year, says Mr Slater. He relies heavily on his accountant for financial advice and his joint venture partner shares the same accountant, which has made things easier.

For Mr Slater, the budgeting process begins with preparations for the annual bank review. In the pre-harvest lull he spent several days looking at the budget implications of cropping options, with the constraint that to make the sharing arrangement work, all cropping has to be wrestled into sensible blocks.

"We have some major blackgrass and brome problems and I am playing about with cropping options to cope with that. We still dont know what our set-aside percentage will be, nor what will be the effect on yield of an expensive take-all seed dressing which we used outside budget."

Using the spreadsheet shows him the financial implications of possible outcomes from variations on all of these themes.

His advice to anyone approaching budgeting for the first time is not to worry too much about pinning down exact costs, or exactly what yields will be. "As long as it is within a realistic range for your land, get it down and work from there." &#42

Careful budgeting has helped Jonathan Slater tighten cost control and identify diversifications, including four trout ponds, at Windolphs Farm, Sudbury, Suffolk.

MOST business failures are the result of a lack of cash, not a lack of assets.

Making realistic financial plans can contribute a great deal to preventing such failure. Yet almost six out of 10 arable farmers do not budget.

"Its a bit like not having a map. How can you plan the best route if you dont know where you are supposed to be going?" says Keith Davis, agricultural manager for Lloyds TSB in East Anglia.

A budget simply states what is expected to be earned and spent in a given financial period, usually a year. It includes a cash flow forecast showing when money will be spent and received, plus a profit and loss account showing the result of those transactions, depreciation and valuations.

"Monitoring a budget can produce an early warning when things are going wrong and, conversely, if things are going better than planned," says Tim Porter, head of agriculture at Lloyds TSB. Such information can also help farmers take up any new business opportunities

Sensitivity to the effects of price and yield variations can also be tested, allowing the manager or owner to ask "what if" and see the result. That is much easier if the budget is done on a computer.

"Looking at sensitivity also allows you to identify what you need to change to get back on budget if things are not going right. If you know how to change things to make a profit, or can quantify a deficit in advance, then you are in a position to judge realistic prospects and options," says Mr Davis.

"You might have to consider, for example, whether you are prepared to borrow your drawings for a couple of years if you can see that the business is not going to produce enough to cover drawings during that period, but that it is likely to do so thereafter. At least then you have made a conscious decision rather than being forced into this position.

"The important thing is to know whether your business is viable if you carry on doing the same thing year after year. If not, it is equally important to understand the impact any proposed changes will have."