These days there would be rare instances where a business did not produce profit and cash flow budgets—especially larger businesses that carry significant debt.
The volatile nature of some agricultural production and trading environments has encouraged banks to mitigate their potential lending risk through demanding more comprehensive reporting about each client’s financial performance and position.
In the effort required to prepare that information the bigger, long-term picture of the business and family can be obscured, or forgotten.
One way of breathing life and real interest into the budgeting process is to keep in mind the context in which they are prepared.
Different circumstances
Naturally, businesses will find themselves in different situations at times in their life cycle.
Some situations are so demanding that any long-term family plans are simply put to one side because short-term priorities rule behaviour. For example:
- Those in crisis.
Sustaining a number of seasonal losses can place a business in a vulnerable position. Equity has been eroded, and there may be doubts about the capacity of the owners to meet lenders’ debt-servicing requirements. In this case, long-term plans can be forgotten in the day-to-day demands of generating enough cash flow to merely survive. - Those expanding.
Business expansion is a positive thing and is normally undertaken in response to long-term goals.
However, expansion can also come with significant financial risk and, again, the immediate need might be to meet specific, large, funding repayments.
Then there are those in ‘stable’ environments. These businesses are in that part of the business cycle when things are going pretty steadily from one year to the next. For these owners there is no excuse not to reflect on why they are in business in the first place.
Longer-term vision and profits
Owners should preferably be trying to ensure that they are considering the business and personal needs and expectations of family members some three to five years ahead, and implementing actions that will create the preferred future.
It is from this exercise that business strategies flow for which financial measurement and reporting is required.
It is the business which must deliver the profit flows that will enable personal expectations to be met.
Creating and implementing that long-term vision (continued next month)
See this article in Tree Fruit July 2015
