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Forecasting or budgeting farm finances
Forecasting outputs and costs helps to show future stability of your business and budget for future investments.
The first thing to consider as part of the financials of your business plan is how much money you need to make – for your private drawings, to pay your mortgage or landlord, and for tax or loan repayments. This will show the profit requirements for your business. Download our profit target worksheet to help with this step.
Outputs and incomes
Once you have an understanding of the profit you need to achieve, you can delve further into projecting the outputs (sales) required to generate these profits, to demonstrate the strength of your business.
Forecasting your outputs and incomes is an integral part of the profit and loss account, which shows the estimated profits your business will make over three years by subtracting the costs of running the business from any sales you make. It takes into account the value of the stock that you hold, so you will need this information to hand when you complete the template.
You may have your own historical performance to use as a basis for estimating your future sales. It may be worthwhile comparing your data with the data AHDB publishes about average yields, outputs and prices as part of this forecasting. If you are starting a new business, this data will be useful. Find out more by following the links in the table below.
The profit and loss account includes a section on sundry income, e.g. rents, wayleave payments and sporting rents. It also includes your Basic Payment Scheme (BPS) and agri-environment scheme income. The BPS is only guaranteed until 2022 and may be discontinued after then. AHDB has produced a Farm Business Review tool which you can use to investigate the potential impact that Brexit and changes to BPS and agri-environment schemes might have on your farm income.
Sector-specific information about outputs and incomes is given below. Information is not available for horticulture due to the broad range of products grown.
Outputs
Enhancing herd genetics can improve growth and carcase characteristics and therefore your future sales.
Signet sheep breed performance
Incomes/prices
Outputs
The AHDB Recommended Lists for cereals and oilseeds 2016–2021 (RL) project provides independent information on yield and quality performance.
Incomes/prices
The Cereals & Oilseeds New Market Data Centre allows you to access current and historical prices.
Finished pig and weaner prices from the GB and across the EU.
Weekly production information about pig slaughterings for Great Britain, along with supporting information about carcase weights and back fat levels of GB pigs.
Variable costs and overheads
Once you have forecast the incomes you require to be a profitable business, you need to consider the costs involved in producing your crops and/or livestock. These are split into variable and fixed costs.
Variable costs will tend to change proportionate to your output and are things you would stop paying if you stopped a farming enterprise. They include:
- Artificial insemination
- New stock
- Vets and medicines
- Forage, feed, concentrates
- Bedding
- Weed/pest/rodent control
- Fertilisers
- Seed
- Soil/substrate
Fixed costs or overheads are aspects which still might need to be paid if you stopped a farming enterprise. They include:
- Labour – salaries, NI, pension, tax, bonuses, training, recruitment costs
- Operations – utilities, purchase of machinery, lease of machinery, maintenance, insurance
- Property – land/building leases
- Vehicles – purchases, leases, fuel, tax, insurance, maintenance
- Sales – marketing, packaging, distribution
- Other – legal/accountancy/secretarial costs, stationery, bank charges, interest
- Depreciation
When forecasting your costs, look back at your historical data to get a better idea of what you paid in the past rather than relying on the current costs of inputs. When prices are averaged over a longer period, price extremes are smoothed out. Three- and five-year rolling averages can help you see longer-term prices and also might indicate whether prices are generally going up or down.
Sensitivity analysis
Applying 'sensitivity analysis' for key input costs and output prices allows you to explore the effect they have on your profit and loss. These could include:
- Concentrate feed price +/- £25/t
- Fertiliser +/- £25/t
- Interest rates +/- 2%
- Fuel +/- 10 ppl
- Grain yield +/- 2 t/ha
- Milk price +/- 5 ppl
- Cull cow/calf price +/- £25/head
- Beef or lamb price +/- £0.50/kg deadweight
Machinery costs and depreciation
AHDB has produced a machinery costing calculator. This simple tool can help you calculate the cost of farm machinery, per hectare or per hour. It can also be used to compare the costs of owning equipment with the cost of hiring it or getting in a contractor. Different machinery systems can also be compared and repair costs can be calculated for budgeting purposes.
We have recently ran a webinar discussing exploring how to manage machinery costs. Watch a video of this webinar below.
Depreciation is important because you need to reinvest in your business and this effectively allows you to set money aside to do this. It spreads the costs of purchasing an asset over its lifetime. We calculate this as a straight line 10% of the current value of the equipment and 5% for buildings, based on AHDB research. Depreciation is calculated automatically in the profit and loss templates provided.
Cash flow
A cash flow forecast estimates the flow into and out of your business over a 12-month period. It is important because it shows that the business is able to continue trading, pay suppliers and employees. It will show the expected peaks and troughs over the coming months and allow your business to plan for the costs it will have to cover over that time.
There are some ways that you can even out cash flow. If you need to purchase new machinery, can you take out finance over a few years? Are you able to receive an advance payment from your merchant for a proportion of your grain? What are your creditor and debtor terms, and can they be altered so that payments to you come in sooner or give you more time to pay?
Balance sheet
The balance sheet is vital to a business owner. It deals with the capital (all the money) invested in the business at one particular point in time, usually the last day of the financial year. It is made up of two lists – one showing the value of all the possessions (assets) in the business, and the other detailing the associated debts (liabilities). The owner’s investment or stake in the business is called the net worth (or net capital or owner equity). Net worth is the amount left if all the assets are sold and all debts are repaid at the balance sheet values.
When compared over multiple years, it can give an indication of the financial status of a business. A stable business will see an increase in net worth year on year.