In the fifth article of our series focused on scenario planning, we provide guidance on how agricultural producers should approach budgeting and forecasting for the upcoming year.
Key insights
- Compare your forecast to actual results to gain a stronger understanding of how the organization behaves financially when business or market factors change.
- Use your forecasting model to measure the impact of key variables like yield, price, payroll, and maintenance.
- A forecast helps evaluate strategies and tactics to mitigate or better understand financial stresses.
- Since agricultural production requires significant assets, include capital expenditures when building a forecast.
Need help developing a forecast?
A forecast of financial results can be a powerful tool for an agricultural producer. It’s effectively a quantification of the strategy and tactics of that organization, which can:
- Drive strategic alignment of leadership.
- Aid in communication of strategy, goals, and tactics to lenders, management, and staff.
- Provide a tool to make quick and confident decisions.
When comparing predictions (forecast) to actual results, you gain a stronger understanding of how the organization behaves financially when business or market factors change. To determine a more financially favorable strategy, identify strengths and weaknesses of the organization, as well as the opportunities and threats, then use a forecast to quantify and track the impact of all of those factors. Take into account any industry-specific impacts of COVID-19, too.
Scenario planning is already tough, and it’s even tougher when you are faced with a once-in-a-generation pandemic. In this fifth article of our series focused on scenario planning, we provide guidance for budgeting and forecasting as we approach 2021.
Don’t wait to create a forecast
Stay prepared and don’t wait until you need a forecast to develop one. Have a tool and template already built, one that everyone has used before, to handle “what-if” scenarios more accurately and make better decisions.
Use the forecasting model to measure the impact of key variables, even if you only forecast one scenario. For a grain producer, key variables likely include yield and price, but payroll, trucking, storage, maintenance, and marketing costs are also impacted by changes in yield assumptions. Model the high, low, and most likely values for key variables, so leadership can confirm assess the impact to key metrics.
Move quickly to take advantage of business opportunities. When you know the type of opportunities your organization has the desire, strategic alignment, and financial capacity to pursue, you can make swift and confident decisions when opportunities arise.
Use a forecast as you evaluate growth opportunities and stress mitigation tactics. Examples of typical growth opportunities for an agricultural producer include (but are not limited to):
- Equipment fleet purchases
- Operational expansion
- Partnerships with other operations
- Acquisitions of competitors
Evaluate opportunities to vertically integrate through the acquisition of a key supplier, competitor, or customer. For example, grain producers can purchase local grain elevators or livestock producers can purchase processing facilities. Well-aligned combinations of organizations can produce significant financial efficiencies, but having a forecast to model the acquisition is critical.
Outside debt or capital is likely needed to execute the purchase or sale of a supplier, competitor, or customer. The debt or capital source will want to know the plan for the use of their funds and expected operational results for the new organization. The base forecast, modified to fold in the effect of the acquisition or sale, will help all parties communicate more effectively and gain common understandings.
In addition to aiding in growth opportunities, forecasting allows you to evaluate strategies and tactics to mitigate or better understand financial stresses. Examples of common financial stresses for agricultural producers include:
- Inadequate cash flow
- Low pricing and margin
- Reduced marketing channels.
Tactics taken during financial stress include labor reductions, selling of underutilized assets, or cost control.
Identify key business drivers
Include capital expenditures (CapEx) as you build a forecast. Many agricultural producers require significant assets, which can include:
- Production buildings
- Processing buildings
- Storage buildings
- Land
- Irrigation
- Drainage
- Equipment
- Vehicles
Capital assets facilitate operations and significantly impact cash flow and borrowing needs.
CapEx is often the first area to reevaluate if your forecast shows a cash shortage. Identify the annual baseline CapEx of your business, which is what’s required to maintain an organization’s assets (rather than CapEx to grow an organization).
If we zoom in on grain producers again, a forecast should gather revenues and expenses by crop and by year. Separate the crops and the crop year, because there’s typically significant overlap. A crop year’s activity can start with prepays on inputs in the fall before planting, and the harvested grain may still be in the bin until summer of the year after harvest (20 or more months across three calendar years).
Consistently gather revenues and costs by crop and by year, since it allows for easier profitability analysis. If you move from calendar-year cash-basis profitability reporting to accrual-basis by crop and by year reporting (which includes comparing actual results to forecasted results), your leaders will have a much deeper understanding of your organization.
How we can help
At CLA, we provide financial planning assistance for companies in a wide range of industries. No matter where you are in the process, our team can provide a helping hand as you forecast and budget for 2021. Get in touch with our agribusiness professionals today for more information.