One budget isn’t always enough for your agribusiness clients

Reports vary on how many Kiwi agribusinesses have a budget, but the common thread among the various surveys and reports is “not enough”.

Even those agribusiness managers who are budgeting aren’t always getting it right or receiving enough professional support and advice along the way.

As most agribusiness advisors know, having a budget built in consultation with a rural accounting specialist or agribusiness adviser, where the owner/manager and funders are aligned and committed to it is the benchmark. This would still be the exception and not the norm in New Zealand, unfortunately.

Traditional types of budgets

There are many types of, lets call them less than ideal budgets you might have bumped into over the years when dealing with your agribusiness clients.

• The ‘in the head’ budget. It’s been developed over time using practical experience and has been relied upon for years; it changes on the fly and can be subject to much debate when catching up with the accountant or the bank manager.
• The ‘back of the envelope’ budget. A step up from the ‘in the head’ budget, but it’s often hard to decipher for anyone other than the author and open for much debate in terms of methodology and meaning.
• The bank’s budget. But banks shouldn’t be doing budgets anymore, right? Maybe not, but there are still a lot out there. The bank budget is set by the rural manager to line up with funding requirements. It rarely has full buy in from the agribusiness owner/manager, nor full oversight from other trusted advisors.
• The ‘set-and-forget’ budget. Developed with great intentions but left sitting in the bottom of the drawer under an ever-growing pile of invoices, timesheets and fuel summaries. Referred to possibly when reviewing the end of year accounts, well after the financial year has actually ended and after the next budget has been developed.
• There are probably many more, and while these are all better than no budget, it’s only by a very slim margin.

Making a case for multiple budget methods

Given that it’s hard enough to get good budgeting habits started, you’re probably going to call me crazy when I tell you having just one budget with your clients isn’t really enough.

Why would anyone need more than one budget, you may ask?

Depending on your methodology for whipping them up, a standard budget is relatively static. It lays out some income predictions based on what’s happened in the past and how the schedules are looking in the year ahead. It sets some spending limits/targets based off the work that needs to be done in the business and the income or debt funding available to do it. It’s a plan based off the average best guess for the year ahead.

Hopefully, your budgets are all building towards some form of longer business goal or outcome, but that’s a whole other article.

But nothing is constant in agribusiness. Variables such as exchange rates, weather, governments and so on can all throw a spanner in the works .

Sure, you can just hop in and edit the budget as things change, but wouldn’t you rather be prepared and have a plan for the various foreseeable scenarios that could play out during the year?

READ: 5 challenges to agribusiness clients will face in 2019

How to introduce multiple budgets for your agribusiness clients

You should be sitting down with your clients prior to the year getting under way and working through various scenarios that could play out for the year. Just like any good sports team, you need to go through the plays you can roll out to counter whatever the opposition aka the weather or economy throws at you.

This is where you can really add value as an advisor. You have the tools using modern cloud accounting software to build as many budgets/scenarios as you like, and you can check how each impacts the bottom line.

These budgets can be specifically designed for use when coping with adversity, such as a ‘dry year’ budget or ‘lamb price tanking post-Christmas’ budget.

If you really want to justify your fees, you take this basic multi-budget scenario planning further and model different management approaches within a given scenario to help decide the best way to manage challenges. For example, you could model bringing feed in versus destocking. Build things out a few years to accommodate their stocking and have a far better idea the ramifications on cash flow and the balance sheet in the long term.

Sure, there’s a bit of work involved, but it’s forward-looking, value-adding work, which can result in tangible differences over both the short- and long-term viability of your client’s business.

For those clients with EOFY falling in May, June or July, these conversations should be starting to take place now.

Once the basic budget has been developed for what is expected in the year ahead, talk about some possible scenarios that could impact it and build up some contingency budgets/plans to tackle them.