It has been well demonstrated that there is a strong relationship between operating costs and farm profit. Profitable farms are managed in a way that balances the farm budget with a wider view of the impact that non-budgeted spending, or lack of it, will have on the overall farming operation.
First, you need to take ownership of your annual budget and monthly cashflows.
Either do it yourself or work closely with the person who does it for you. You also need to have clear written goals to test spending decisions against.
Second, it is really important that the person doing the books and the person making the spending decisions onfarm are either the same person or they are working closely together.
The flowchart has been adapted from a diagram that a Bay of Plenty farmer used to test spending onfarm, in combination with a budget and with clear goals in mind.
The original flowchart was drawn up in a previous downturn, in response to a specific but not uncommon farm business situation where he had a penchant for impulsive spending and she thought she controlled the purse strings through a detailed budget. The chart is now used to test all non-budgeted spending requests that he might have.
This thinking process can be used equally well for operating expenses like animal health as well as capital expenditure like a new digger.
One of the first questions to ask is can we afford not to do it? The next question is ‘does this fit with our goals for this year?, then ‘will it give a financial return’?”.
We’ve all been faced with the dilemma of something unexpected happening or an opportunity presenting itself unexpectedly.
Try this template and ask yourself these questions to test your spending. Take control of your purchasing decisions and run them through this process to build a stronger business.
• For more tips on budgeting and farm decision-making visit dairynz.co.nz/tactics.
