Can agribusiness budgets be more relevant?

January 16, 2017 5:23 pm

One of the descriptors used to define agribusiness being “the business of agricultural production and services related” is a simple one and belies the skills required of owners and managers to coordinate multiple productive and financial variables, most of which are outside of their control (weather and commodity markets are two that come easily to mind). It is in this highly variable nature of agriculture where seemingly minor adjustments in key productive parameters, such as productive performance and/or pricing, can lead to large fluctuations in the financial performance if the business; that the question might be posed, ‘how relevant is the annual agribusiness budget?” producers provide to key stakeholders (such as family shareholders or independent investors) and advisors (accountant, bankers etc.).

Statements such as “not worth the paper it’s written on” and “obsolete from the day it was completed” often come to mind when considering the traditional budgetary process adopted for a conventional agricultural enterprise, however more and more, and without distinguishing between family or corporate, modern agribusiness is large scale and involve management and financial decisions that are complex in nature and must be quantifiable in terms of their impact on the business.

In order to develop a sound and robust agribusiness cash flow budget that can be reviewed periodically (monthly or quarterly) against the actual performance of the business (actuals vs forecast), and allows owners and stakeholders to understand future impact of today’s decisions, the critical piece of infrastructure is the development of the “business engine”. This engine will be ‘time based’ and fully flexible according to the nature of the business operation (examples include a month on month stock movement projection and operations plan for a livestock operation; or a detailed month on month paddock operations plan for a horticultural operation).

The development of this piece of business architecture allows the owner to 1) understand how changes in the timing of productive activities might impact on business cash flow, and 2) how changes to key productive or financial variables will impact on business performance. Obtaining a detailed understanding of these two areas provides a solid and robust framework for combining and comparing actual financial performance with the original financial projection.

So what are the benefits of this process?

Obtaining a regular monthly or quarterly assessment and update of the performance of the business compared to the original forecast; and understanding how changes to productive or pricing variables in the coming month or quarter will impact the business (based upon the most up to date market and yield information) will allow better business and cash flow control; and provide owners with a greater understanding of the impact of their buying and selling decisions. The implementation of such a process will also allow owners to provide regular and detailed cash flow updates to their financial institution, allowing them a closer understanding of productive and financial risk within the financial year.

Impact Ag provides detailed monthly and quarterly time based financial forecasting services to its clients across multiple agribusiness sectors.