23 August 2002

BUDGETSVITALFORBUSINESS

Budgets may be the last

thing hard-pressed arable

farmers want to spend

time on when miserable

margins are apparent to

all. But Suzie Horne

explains why they are vital

for business survival

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."

Lloyds TSB Agricultures Focus On Farming survey showed that in 2002 only 43% of arable farmers had drawn up a detailed budget for next year, slightly fewer than in 2001. The main source of information on the financial position of the business was the bank statement, unlike in 2001 when year-end tax accounts were preferred, highlighting the increasing importance of cash flow to the survival of farming businesses.

Six out of 10 growers fail to budget

&#8226 Be realistic, seek help if unsure.

&#8226 Monitor progress.

&#8226 Reconcile cash flow forecast to profit and loss forecast to avoid confusion.

&#8226 Helps test business sensitivity to price and yield changes.

&#8226 Info aids decisions and outside advisers.

&#8226 Helps pinpoint reasons for variations.

After 17 years looking after her own non-farming business managing without a budget never occurred to Anna Moore when she took on 222ha Red House Farm at Halstead, Essex, nine years ago.