Preparing a budget. How hard is it?

Preparing a budget.

How hard is it?

BY CHRIS PUCKRIDGE RURAL AND SMALL BUSINESS FINANCIAL COUNSELLOR, RURAL WEST

Many growers in the horticultural sector have grown their businesses over time and they have been able to fund their business growth with the money generated by their business.

Preparing a budget for your business enables you to be in real control of the business.

3 BUSINESSES who have not upgraded their financial structures over time often find themselves in difficulty.

This has often meant that in the initial stages of their business they have not needed funds from banks or other lenders, or if they have, they have often used credit cards or accessed the equity in their home to have cash available.

This can only work for so long! As a business grows and becomes more complex there will nearly always be the need to access external capital. This might be for business expansion (such as buying more land or machinery) or for operating costs and funding the business when there is no cash available.

Businesses who have not upgraded their financial structures over time often find themselves in difficulty. These businesses are often forced to rely on expensive credit facilities, or their business is so cash starved that it runs down over time which can then mean funds are not available for maintenance or upgrading of infrastructure. So inevitably most people in horticulture, or any farming business for that matter, will at some stage need to upgrade their financial structure so that they can borrow external funds.

How do you change your financial structure?

This often begins in meeting with your accountant or other professional adviser to identify your financial needs and how you want the business to move forward. This can then lead you to meeting with a bank or other lender and reviewing your existing business performance with the bank and helping the bank understand your future cashflow and need for capital. Sometimes you may not want to have the actual funds, but you want to have the peace of mind of knowing that funds are available to the business should they be needed, for example if there is a crop failure or other unforeseen event that impacts on your cashflow.

So, why is a budget so critical?

Preparing a budget for your business enables you to be in real control of the business and stops the business from controlling you. You have peace of mind of knowing what to expect and you can adjust and change the budget as you move forward and adapt to the impact of prices or seasonal fluctuations. • Achievable — the budget needs to be able to be explained to third parties so that they can understand it and see that is both realistic and manageable • Resourced — the budget must reflect the real costs of production and needs to allow for a reasonable margin to consider unforeseen events such as maintenance and replacement of plant and machinery • Time-related — the budget needs to specify when the results can be achieved and be as accurate as it can be in forecasting monthly expenses and income.

This can sound hard if you have not done it before, but once you have a budget in place it becomes easier to manage the ongoing adjustment and forecasting of your budget from year to year.

Having a budget in place means that you can then focus on the strategic areas of your business and not get so bogged down in chasing the day-to-day issues of finding payments for unexpected invoices. Preparing and reviewing your budget also gives you a much great insight into the business and helps you to see the strong and weak points of the business.

What does a potential lender require from you to loan you the money you need?

In general, a lender will need to see a professionally prepared budget for not only the current financial year, but also a projected budget for the next three or even five years.

This can sound daunting, but once you build the initial budget for year one it is a simple matter of then adjusting the budget for year on year. This means you can build in any plans you have for increased investment and increased income from farm development and production improvements. The key elements of any budget can be summarised using the acronym SMART: • Specific — the budget needs to be focused on the actuals of the business and be factual and realistic • Measurable — the budget needs to be related to your production capacity and include all aspects of your business relating to costs and income

In summary

Preparing a budget for your business is a major step in creating longterm strength for the business and expanding your options to attract lending alternatives. It also gives you the ability to deal with a wider range of financial institutions if you need to look at restructuring the financial base of your business. Preparing a budget also enables you, as the owner, to have a deeper understanding of the capacity of your business and allows you to focus on the most important aspects of the business.

MORE INFORMATION

moneysmart.gov.au is a fantastic website for anyone looking to increase their financial knowledge and skills. The site is not only useful for business owners but for anyone who wants to understand more about managing their finances. Rural West is supported by the State and Federal governments, Rural West works with a wide range of primary producers and regional small business owners to improve their position and profitability. Call 1800 612 004 or visit ruralwest.com.au for more information.