Farmers know better than anyone that preparing a forecast is not always as simple as cutting and pasting from last year. Profits and net cash flow generated from farming operations can change significantly year on year due to the influences of a multitude of variables. Some variables are unpredictable, such as weather, commodity prices, conflict and government policies. However, farm owners can estimate several income and expense drivers with reasonable accuracy based on their invaluable experience on farm over many decades. With the assistance of an advisor competent in preparing detailed cash flow forecasts, farmers can then use their knowledge to forecast expected profit and cash flow for the year (or years) ahead.

At Smith Thornton, we often assist our farming clients with preparing their annual farm forecast. For some farmers, a quarterly review and update is preferred or required, depending on their financial circumstances, the size of their farming operations, or whether they are experiencing a period of change. In preparing the forecast, it is important to review and discuss key farming inputs and assumptions, future plans, financing, capital expenditure, changes to operations, and even succession. The more information discussed and clearly understood, the more robust the forecasting will be.

Key inputs and assumptions that should be considered include:

Livestock schedules:

Destocking and restocking are occurring across many farming operations off the back of poor pricing and drought conditions. It is therefore important to forecast livestock numbers, including natural increases, birth rates, death rates, sales and purchases. Operational changes such as running a new breed or holding stock longer/shorter than usual also need to be given careful consideration. 

Commodity pricing:

Whilst we can’t predict commodity pricing with 100% accuracy, we can apply prices that are reflective of industry forecasts. We can also apply conservative prices to test worst case scenarios. 

Crop rotations:

Crop rotations are common and are adopted to improve soil nutrients and yields. This means crop types, hectares and expected yields need to be reviewed yearly.

Fertiliser and chemicals:

Fertiliser and chemical types, quantities and pricing need to be reviewed on an annual basis to ensure that the cost is reflective of cropping and livestock plans. If the farm operates with an overdraft facility and cash is tight, fertiliser payment is often deferred and paid once crop sales are made. It is important to consider the timing of payments to accurately forecast a cash balance.

Seed and seeding:

Consider whether seed is available on farm or whether it needs to be purchased. Consider crop rotations, what type of seed will be required, and what type and how much seed is required for pasture. Seeds will also need to be sown by owners, staff, or a contractor. The costs associated with these vary, so consider which is most appropriate for the year ahead. 

Stock expenses:

Lice treatments, vaccinations, tags, drenching and vet expenses are significant costs for livestock farmers. They are also dependent on the breed and livestock numbers on farm, so can change year on year depending on the farming operations.

Shearing and crutching:

Every sheep farmer will understand the large expense involved in shearing and crutching a herd. It is, therefore, imperative that the timing of shearing and crutching throughout the season is considered when preparing a farm forecast, as this will have a significant impact on the monthly cash balance. Destocking and restocking of sheep will also impact this expense, along with the breed of sheep on farm.

Harvesting:

Harvest will occur at a similar time each year, although it can vary depending on weather experienced throughout the season and leading up to harvest. The key to forecasting harvest costs is to consider harvest conditions, fuel, contractor availability, receival and storage fees, and the condition of equipment required for harvest.

Repairs and maintenance:

Repairs year on year can vary wildly and unexpectedly. We can’t forecast unexpected expensive equipment failure, but we can budget for a certain level of repairs, knowing that equipment breaks occasionally. We can also consider the condition of farm equipment, whether major maintenance should be planned, along with the costs associated with regular servicing of equipment/vehicles and property maintenance.

Financing:

Most farms have debt, whether it be through long term loans, equipment finance or an overdraft facility. Understanding the terms of these debt facilities and the impact that they have on cash flow is important.

Plant & equipment:

Equipment gets old, farms expand, and operations change. If plant and equipment need to be replaced or purchased, this needs to be planned for, and financing needs should be considered. Needs will need to be prioritised if cash flow is an issue.

Living expenses:

Farm owners also need to live! Monthly drawings, personal debts, schooling expenses, holidays, personal insurances and income tax should all be considered when preparing a farm forecast.

Preparing a farm forecast is a time-consuming exercise and requires careful thought and consideration. Albeit a tedious task, it does provide peace of mind, knowing what to expect when it comes to cash flow and then having time to change some decisions or talk to the bank if necessary. The information passed around when preparing a farm forecast is also invaluable when the next generation becomes involved in these discussions. It gives the next generation a good insight into the financial considerations of operating a farm, which is a part of the business that they are often not involved in. 

If you need help preparing your farm forecast, please  contact us at Smith Thornton and we will be happy to assist.