By Tim Brhel, Ag Finance Advisor
With tighter times in ag right now, it’s more important than ever for farmers to be on top of their operation’s numbers. Lenders are asking for quite a bit more financial data than in the past five to ten years. Some banks are even starting to require monthly cash flow plans.
There’s a lot for farm leaders to keep up with, and making sure you have the best possible financial data about your operation is one important piece. A powerful way to do this is through a monthly budget to actual review.
With regular bookkeeping processes in place, these reviews don’t require much additional work but can make a big difference. Doing a monthly review of your numbers helps you stay on track—both with major decisions and in knowing your financial position at any given point in a year.
Here’s how the budget-to-actual process works. Each month, you send your ag finance advisor a statement of all the activities within your accounting software program that month (it typically takes about five minutes or so to export the needed reports).
Then, your advisor does an analysis that will show a few things. One column shows the amount that you’ve budgeted for a given category—repairs, for instance. In another, you’ll see what’s been spent in that category, year to date. The final column shows you how much remains for the amount budgeted in each category.
The review time becomes an automatic check-in each month, where you can determine whether or not what’s left is enough to get you through the end of the year. You’re able to update and dynamically make changes as you see fit. You can check on how you’re doing, while you still have time to make different choices to impact the crop year.
Once you’ve used this process for a full year, the benefits become even more powerful. You can create a more accurate budget to start the next year with, because it’s based on the numbers from your previous year. This can be very helpful when budgeting for fixed costs. It can also build your banker’s confidence, as they see how the numbers in your budget are tied directly to your books from the previous year.
Using a monthly budget-to-actual review also helps as you’re making business decisions throughout the year. Decisions often must be made during times of high uncertainty. The more high-quality financial data at your disposal, the easier it can become to make decisions for your operation, even when there’s uncertainty.
Monthly budget-to-actual reviews are a powerful process for a farm operation. They’re a must to get a better handle on your financials, especially in large, complex operations with many moving pieces. Gaining more peace of mind about business decisions through better, more accurate financial data is an important step to take for your farm this winter.
Call 866.249.2528 to speak with a Water Street advisor now about getting a monthly budget-to-actual review process in place for your operation.