By Brian E. Ravencraft
A method to address the reduction of unnecessary costs is to first establish which activity of the farm operation generates those costs.
Step 1: Identify activities which generate costs and provide no added value.
Step 2: Decide if changes to that activity will affect business turnover
Answer: NO? Then is the activity necessary or adding value?
Answer: YES? Cost reduction techniques may have adverse effect on business profitability.
Beware: cost cutting can have a long-term negative impact. For some farmers, failure to invest in people, marketing and technology can leave you falling behind your competitors. You are increasingly likely to provide a product and service of inferior quality. You will also be likely to experience above-average team turnover. And ultimately, your customers have a choice, and you will cease to be it.
Deferring payments to suppliers and service providers helps you keep the cash in your pocket longer. Pay your bills on time, but not before they are due. Do however take advantage of discounts offered for payments made before the due date. Better to pay less rather than later. It is also important to keep your suppliers sweet in case you need them to satisfy a rush job. If you have a short-term cash flow problem, it’s often best to talk with your suppliers and negotiate payment terms, rather than annoying them by simply not paying or putting them off with the old “the check’s in the post” line.
Thus, make the most of trade credit terms. For farming operations working on credit it does not make commercial sense to pay your bills before the due date.
Cash flow: One of the three key measures
The basis to managing cash flow is to ensure that you measure it — plan for it and prepare. Cash flow forecasting is an essential management tool, allowing you to understand the peaks and troughs of your business and understanding the effect of seasonal variations, credit policies, and balance sheet transactions.
The three most important things to measure in a farming business are customer satisfaction, employee satisfaction and cash flow. It’s interesting to note that two of those three are non-financial Key Performance Indicators (KPI’s). When we work with our clients to help them implement KPI systems, we often find that there is a good mixture of financial and non-financial measures that it’s important to measure to manage the business effectively.
Below are some budgeting tips that you can try:
- Be realistic. Business budgeting should be based on numbers that is backed up by sensible expectations. These expectations should be based on both previous business financial performance and projected business developments.
- Budgeting should be time-bound. Farm budgets should be prepared under a specific timeframe. The budget is most of the time based on the farming business’ fiscal year or you can also project a budget on a monthly or quarterly basis. It is recommended that you break down your budget on a monthly basis even if you have already prepared it on your farming business’ fiscal year. To make your farming budgeting easy, consider using a financial program or software.
- Make an estimate on your income and expenses. Farmers may use preceding year’s data. Consequently, farmers can also look at current or projected market prices to project estimated income and expenses. You should use what is the most probable, when preparing your budget.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com or at BRavencraft@HolbrookManter.com.