How does driver based rolling forecasting apply to “growers and producers”?
Like all businesses, Grower Producers 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.
Unlike other businesses that purchase inventory for resale, grower producers need to reflect the increasing value of a maturing crop by accumulating all the direct production and harvest costs to an inventory/WIP account. Then once the crop is harvested and processed, inventories are then sold down by matching the cost of goods sold with revenues received. This methodology is important for measuring and reporting both profitability and the seasonal lockup of cash flows.
What if the sales price increases or decreases what’s the likely impact on our overdraft and when? If we lock in a forward contract price what is the impact if costs change? Can we repay some debt but leave some funds aside for equipment and other capital improvements?
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.
Let’s look at an example of a Winery as this has to be one of the most challenging businesses to be in simply because of the environments final say in crop quality and quantity.
The accounting methodology for wineries is more complex than other grower producers because of the additional post harvest production and bottling processes. I.e. following the crop harvest, the accumulated inventory “cost of harvest” is transferred to “bulk red and white wines” and then to “bottled stock” according to a production and sales plan. External purchasing and regional blending also adds to the inventory mix where sales targets exceed produced bottled stocks.
Non financial revenue and expense drivers include the Price and Volume of varieties produced (by distribution channel) and the cost per bottled stock.