There is no doubt the 2020 drought will have a serious financial impact for businesses with many farms reducing capital stock numbers during the drought to assist with their cashflow. But while many farming businesses will be starting the year with reduced stock numbers, this may not materialise as reduced profits until FY21/22.
It's important to start planning for the year ahead by including both a profit and a cashflow forecast as drought impacts may have a differing effect on both, particularly depending upon how you choose to rebuild your capital stock.
Traditionally, many farming budgets are not formalised on paper. Whilst this was once acceptable practice, most banks or finance institutions now require a robust budget including cash forecasts before they will extend lending facilities or provide new ones.
For those who don't usually prepare a budget, now is a great time to start. The outcome of the drought may take a while to show its true impact, so taking the time to prepare now will provide you with some clarity around future cashflow and potential profitability. Having an accurate budget can also take the guesswork out of financially-related decision making when times get tough or you are uncertain about the way forward, particularly as the season changes.
The hardest part of preparing a budget can be getting started! Using the prior year as a base to work from and adapting and changing the timing and volume of activities is often a good way to begin. Once you have your base, modern software makes it easy to alter and amend to show various scenarios. This provides you with a good understanding of the potential impacts that decisions on cashflow and profit may have.
