For many farmers preparing a farm budget is all about identifying lending requirements for the year, prior to meeting with the local bank manager. As part of this process, a statement of position is also usually prepared which will calculate the farmer’s equity position. A strong equity position will generally result in the bank applying a smaller margin and resulting in a lower overall interest rate.
Conversely, a bank will “price for risk” (i.e. increase their margin) if the equity position is not strong. After determining cashflow requirements and meeting with the bank manager the budget is often parked in a filing cabinet to gather dust. From an accounting perspective, a lot of effort tends to go into the budget process, so it seems a shame to not maximise the value of a farm budget.
Other “non-bank driven” reasons for keeping the farm budget handy might also be to:
- Maintain a disciplined approach to spending and pricing of produce
- Provide a starting point for succession planning
- Assist in tax planning
A well-planned budget can be a great tool in monitoring actual expenditure against budget and making informed pricing decisions. Obviously seasonal conditions can significantly impact your budget but having this budget in the first place, and trying to stick to it, does provide a level of discipline and accountability, which is often pretty important when a machinery salesman is heading down your driveway with a ‘great’ deal for you.
A lot of farmers will update their budget during the year to factor in seasonal conditions or changes in pricing. Having an up-to-date projection of cashflow will assist in making well-informed and timely decisions.
A statement of position which records assets at market value is often a better indicator of net wealth of a farming family than financial statements, which often record assets at cost and will not necessarily record all assets, such as real estate in personal names. Having a good understanding of the net wealth of a family and the breakup of those assets between farm and non-farm is often a good first step in the succession planning process.
Accountants often rely on a farm budget to prepare tax estimates prior to year-end. From a tax planning perspective, it is always good to know what a farmer is intending to spend post-June to see if there is an opportunity to bring forward that expenditure and reduce tax.
Fully committing to the farm budgeting process can be a rewarding experience for all members of a farming family, especially if that farm budget is utilised to its maximum value.
HOW CAN RSM HELP?
If you have any questions regarding a farm budget, get in contact with your local RSM Expert