How does driver-based forecasting apply to Agricultural Organisations?
Let’s look at an example – Dairy Farming as this is one of the toughest agricultural businesses to be in. And this is because there are so many inputs affecting financial performance including; the environmental impact on pasture growth and production yields, livestock valuations, herd numbers, feed and fertilizer prices as well as the important variable Milk Fat $ payout and its related cash flow patterns.
All these variable inputs are examples of drivers that can be used in calculating forecast results.
Like all businesses, Dairy Farmers need to be in control of their own planning and reporting so that they can update their business plan as and when input variables change. For many smaller units without financing or external party considerations a simple spreadsheet from their accountant maybe sufficient, but for the larger “Corporate” operations, the ability to predict results and inform other owners, banks and investors quickly and accurately is essential.
What if the Milk Fat payout drops from $6.50 to $5.50, what’s the impact on our overdraft and when? What if the payout increases how does this impact profitability and cash flow? Can we repay some principle but leave some funds aside for equipment and other capital improvements?
What feed and fertilizers do we need and when, what will cash flow be like? Do we have the funds or facility available? What’s the likely cost and can we negotiate with Ravensdown or another supplier for a bulk purchase?
How do you quantify and report the financial impact of such changes to banks and investors when the impact is not in the current season but in many seasons to come?
The solution is a driver-based rolling forecast covering at least two or more seasons.