Budgeting in a lean year to protect a business and help it emerge ready for better times is an essential skill for arable producers right now. So what do they need to consider?

According to Allan Wilkinson, head of agriculture at HSBC, the key to budgeting during difficult times is having an open dialogue with financial advisers.

© Tim Scrivener

“There’s no question that we’re not going to support farmers through this – it’s part of the business cycle and we are here to help our customers through the tough times to be in a better place afterwards.”

See also: Advice on managing cashflow challenge on arable farms

Every farm is different, so it’s important your bank manager really understands your business.

“Firstly, make sure your accounts are up to date, and sit down with your consultant or accountant to draw up a budget to show what’s happening now,” says Mr Wilkinson.

“It’s about understanding your cost base at the current prices – only once your bank manager understands that can we start to figure out what’s needed.”

Banks will also want to look at the past performance of the business, and budgets should be individually tailored to the farm, not based on average figures, he warns.

It is important to paint a realistic picture, rather than a rosy one, and include all outgoing commitments such as hire purchase payments and so on.

“Going to your bank for help is not something people should feel awkward about – lots of other farming businesses are in the same place.”

Having demonstrated where the business is right now, farmers should then produce a budget and cashflow forecast for the year ahead, and extrapolate that out to three or five years.

HSBC publishes a booklet on forward planning every year, which includes forecast gross margins with sensitivities so growers can see what a £5/t change in wheat price will mean, for example.

Once farmers have drawn together all the figures, they can then start to consider what impact making changes to the business will have both in the short and longer term, says Mr Wilkinson.

“It can be easy to change the business in the short-term, but it might not be the right thing to do for the future – it’s important to understand the longer-term effects.”

Improving cashflow

Where cashflow is particularly tight, it may be possible to delay payments to suppliers, but this should only be done with their blessing, says Mike Awre, a consultant at Old Mill Accountants and Financial Advisers.

“The other area to consider is reducing drawings or capital expenditure – it’s always easier to take control early rather than leave it until the year-end when you could be deeper in the mire.”

Other practical ways to free up cashflow include selling grain earlier, or requesting advance payments against forward sales, says Mr Awre.

“Buying groups can save money on inputs, and sharing machinery with neighbours can reduce costs, although it doesn’t suit everyone.”

Other options include contracting where there is surplus machinery, or using contractors to reduce machinery demands.

“If you have loans that are proving onerous, perhaps you can provide security to reduce the interest rates?”

However, farmers should be careful of making employees redundant, as it could carry a cost and leave them open to disciplinary proceedings if not handled correctly, he warns.

Although producers may be tempted to cut costs in tight times, it can be a false economy, says Mr Wilkinson.

“Saving money on seed, fertiliser and agrochemicals may not be the right thing to do, unless there is another reason for it.

“You need to make sure your output is as strong as possible without going over the top.”

However, it is always sensible to make individual decisions for fields that have blackgrass problems, for example.

Downsizing option

Some farmers may be considering cutting their arable acreage in a bid to cut their losses, but that is not a straightforward decision either.

“Downsizing can reduce output just at a time the business needs its full output to generate cashflow,” says Mr Wilkinson.

“Also, unless you do something to reduce your overheads – such as selling machinery or laying off staff – you could be more loss-making than before. It’s not just about not growing wheat, it’s about everything that’s involved in growing wheat.”

Keeping infrastructure in place is also quite precious, he adds.

“You may consider reviewing small parcels of rented land, but I’m not advocating giving up land because of cashflow. Again, you risk giving up output without decreasing overheads.”

Most businesses have already cut production costs to the bone, so farmers should perhaps consider generating additional income.

“That could be on-farm, or perhaps off-farm work by some family members. There are a number of options but they won’t suit everyone.”

The most important rule in lean times is to communicate, says Mr Awre.

“Whether you’re speaking to your suppliers, bank, or HMRC, if you don’t tell them what’s happening it makes things really difficult.”

New rule

From 6 April sole traders and partners will be able to use the new five-year averaging rule to offset more profitable years against less profitable ones, and potentially generate a tax refund by doing so, he adds.

Other options to reduce tax include maximising use of the Annual Investment Allowance where capital purchases are being made, or reducing payments on account when moving from a profitable to less profitable year.

Where the farm has loans or hire purchase agreements, producers could opt to spread the payments over a longer period, ask for a payment holiday, or change to interest-only payments for a while, says Mr Wilkinson.

“The main thing is not to panic. Pause, consider and reflect, and make decisions that both parties feel comfortable with.”

Where farmers are confident that they have the correct business structure, and simply need to extend borrowings to get them through a tight spot, it’s important to communicate that to their bank manager, he adds.

“If we stopped funding a business every time it made a loss it would be a very uncertain world. Very well run businesses sometimes lose money.

“Of course, if you’re loss-making for several years, including in good times, maybe the business doesn’t have a future.

“Either way it’s important to act early; don’t put it off and allow things to spiral out of control.”