Know costs for target price
Know costs for target price
Budgets and cash flow
projections are crucial
tools to reveal production
costs and help pinpoint a
target price for grain.
Olivia Cooper reports
A STRAW poll at a recent HGCA conference showed that only 10% of farmers know their true unit costs of production.
Without this it is not possible to develop the most basic of marketing requirements: A target price.
Writing down an objective like a target price focuses the mind, says Ken Jackson, regional agriculture manager for HSBC. "It says where you want to be, and then you have to ask how you are going to get there. That is where financial planning really comes into its own."
Many farmers produce annual budgets and cash flows solely for the bank overdraft. "But first and foremost a budget is for the benefit of the business," says Mr Jackson. "You cant run a business by the seat of your pants any more."
A cash flow forecast should be drawn up before the start of the financial year. This covers every movement of cash in and out of the business, including capital, personal drawings, interest charges and diversified income. Any returns not guaranteed to arrive in a certain month (IACS cheques, for example) should be placed in the worst case scenario position, says Mr Jackson.
This will show when peak overdraft requirements will be throughout the year, as well as when surplus cash will be available for reinvestment.
"Most budgets and cash flows are not achieved because most people tend to be too optimistic." Commonly underestimated costs are machinery repairs, while personal drawings and costs of storage, including building and machinery depreciation and losses in store, are often ignored.
Once a reliable cash flow forecast has been drawn up, it should help in creating a marketing plan, as grain sales can be made to raise cash when it is needed. Forward prices for grain are available almost two years before the movement period, and producers calculations should be realistic.
Cash flow should also be monitored monthly, and the impact of any changes written into the strategy. "Monitoring is absolutely essential." Having an accurate, realistic plan can even improve relations with your bank manager, says Mr Jackson.
A cash flow prediction leads to a profit and loss account. "This is cash flow excluding capital items and including depreciation. It tells you what the likely outcome is of your trading. If it shows a loss, break-even or minimal profit then you have got to be asking yourself where your business is going."
This is where unit costs of production can help, as they can establish a target selling price for grain. Add a share of the fixed costs, including drawings and tax, to the variable costs for each crop. Divide by the output tonnage to get the cost/t and translate into a target price. Costs, output and marketing can all be addressed to help reach that price.
"Another benefit of unit costs of production is that you can measure your performance with the industry norm." Mr Jackson says there is a £100/acre difference in profit between the top and bottom 25% of arable farms. *
Having a realistic budget can even improve relations with your bank, says HSBCs Ken Jackson.
• Create an objective.
• Use cash flow forecast to plan grain marketing.
• Use budget to work out unit costs of production.
• Calculate target price.
• Monitor plans, and use to cut costs / boost output.