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The Seven Steps to Building a Forecast

Farmers are now in the position of having to farm for cash. This means it is vital they manage their
finances to ensure a stable cash position.
If you have Cashmanager RURAL, this Seven Steps summary will assist you to get started with a
cashflow forecast. These steps are not a set of instructions on how to use the software, but a guide
covering the high level issues that form the process you need to follow.
The advice given applies to all methods of forecasting, regardless of the software used. However,
this document is heavily biased towards Cashmanager RURAL and points out the pitfalls with
alternative systems. For this we make no apology, as Cashmanager RURAL is a tool that makes
forecasting easier than any other system.
A common situation is where an accountant keeps the actual records and an advisor provides a
forecast on a spreadsheet. For farmers this is not a user friendly solution and is a core reason why
so many farmers find forecasting frustrating.
We are strong advocates of farmers taking ownership and managing their own finances. However,
we equally encourage consultation with rural professionals. Take your forecast to a professional and
ask them to validate your estimates and provide guidance on what if options. It is time and money
well invested.

Step One Set the forecast period

The normal period is to work to your financial year

Forecasts are best done well before the start of the financial year, BUT its never too late to
start!

When starting before balance date, you will need to determine what your expected financial
position will be on that date. This may require preparation of a forecast for the last few
months of this year before you start next year. This is worthwhile as its important the
budget for the next 12 months has the correct starting point

When preparing a budget after the financial year has started, you have the advantage of
being able to use actual information for these months. However unless you have good
systems, understanding what income is owed or bills to be paid at the start of the forecast
period is not easy

Step Two Decide whether your forecast is cash or not


You have two options. This is an important decision.
1. Very large farming businesses may prefer to forecast using the date expense and income are
invoiced. This enables better management accounting but makes estimating the bank
balance almost impossible.
2. Most farmers should forecast using the date they will pay for expenses and the date income
arrives in their bank account. This is the only way to get a cashflow forecast that aligns to
the bank.
March 2009. CRS Software Ltd, Masterton NZ. Ph 06 3700280.

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Step Three- Are your figures Inclusive or Exclusive of GST


There is only one answer. Forecast income and expenditure exclusive of GST. But to get a useful
cashflow bank balance, the tool should estimate the GST effects for you. Cashmanager RURAL is
designed to do this. If you use Cashmanager Rural, click on Setup Business and go to the GST Tab.
Check the reporting mode is set to Exclusive.

Step Four- Jot down the big picture issues


1. How much do you want to spend on yourself?
2. How much do you need to spend on debt servicing and capital repayment?
3. Expected tax payments.
4. Expected income changes as a result of changed policy, climate or prices.
5. Expected farm expenditure changes as a result of changed policy, climate or prices.
These questions do not need to be answered in detail. That can come later. For now it is about big
picture issues.
Yes, your personal drawing should be the first item. Its why you run the farm.

Step Five - Understand your inventory.


This is especially important for livestock farmers. You must know how many animals you have in
each class (age group) on hand at the start of the forecasting period, plus a rough idea on when they
will be ready to sell. Feed and fertiliser are other areas to consider.

Step Six Decide what the source of your estimates will be


1. If you use Cashmanager RURAL, the last 12 months data is an ideal source. You have a major
advantage. Go to Step Seven.
2. Forecasts can also be built by using rules of thumb. These are popular with financiers and
advisors who rely on analysis of many farms to establish benchmarks. They know what the
average cost is for each type of expenditure and what typical incomes should be.
This method provides a quick way to prepare a forecast but has the following pitfalls:a. The forecast is hard to reconcile to last years information and for this reason
farmers (correctly) question the credibility.
b. The lack of correlation to the code structure of actual data, means regularly
replacing each forecast month with actual data, as it becomes available, is at best
difficult.
c. Such forecasts are often prepared in a spreadsheet. There is a simple rule about
spreadsheets. Never hand over a spreadsheet to another person to maintain.
Breaking this rule will create errors, frustration and exasperation.
3. Annual accounts.
Many people expect that their annual accounts might be a great source of detail for
preparing a forecast. Our experience is that they do not deliver...
March 2009. CRS Software Ltd, Masterton NZ. Ph 06 3700280.

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a. The Statement of Financial Performance is useful, but excludes important


information like drawings, debt repayment and capital (which are not detailed
anywhere else either).
b. The figures lack detail.
c. These documents are prepared for tax compliance and this means some figures are
well removed from the management accounting situation.
d. Its rare for the information to be available soon enough to be useful.
e. Invariably there is a gap between what is recorded and where you are today.
f.

Figures are based on the invoiced date, not the cash date and difficult to reconcile to
cash movement at the bank.

Step Seven Building a forecast


Academics recommend you should start with the big topics first. For dairy this is MS income. With
sheep and beef it is the livestock reconciliation. For inexperienced forecasters we disagree. Start
with the easy topics first and learn how to estimate, do not get bogged down in detail and how to
validate against your existing records to industry benchmarks. These skills are vital when dealing
with the big items.
Cashmanager RURAL
1. Click on the New Budget button and create a budget for the next period. Give it a sensible
name. Main already exists, but probably will need extending to cover next year. (It is one
continuous budget, but displayed by years).
2. When the copy option appears, use the Leave empty option. We want a blank sheet to
work on.
3. When the new budget expert is complete, look at the 6 cells at the middle top of the screen.
Line one should be budget, the name of your budget and the year.
4. Now set line two:a. Before balance date the typical is actual, for the current year.
b. If a revised forecast has been maintained for this year, revised is the ideal choice.
Last years should be showing on line two of each cell. These will be used to guide you for
this years estimates.
5. Choose simple codes like electricity, look at what happened last year and forecast monthly
figures.
a. Either type into each month, or enter a figure in the first month and use the right
mouse and copy to remaining months.
b. An option is to right click and copy line two, either in detail, as a summary and by a
percentage change.
c. Look at your estimate and decide if it is realistic.
d. Repeat for the simple codes.
6. Codes like fertiliser may need a little more detail.

March 2009. CRS Software Ltd, Masterton NZ. Ph 06 3700280.

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a. Double click on a cell and a worksheet will appear. In this worksheet you record a
new line for each purchase. Remember the date is when you pay for the fertiliser.
Not when applied. Records the tonnes purchased and the price per tonne. In the
notes detail which paddocks.
7. When codes other than the big ticket items like income are complete, have a break. You
need to be fresh for the next session.
8. Income should be detailed in worksheets, but you can just type in monthly totals if you wish.
The manuals detail how to enter data. The difficult decision is what quantities and what
price to enter. Be realistic. There is no point in being too optimistic, neither is there any
value in being pessimistic. Save these scenarios for a later What if study.
9. Expect to have to spend several sessions on your forecast. It is not a task that can be done
with one iteration. Chances are that you will not like the answer from the first forecast.
Several sessions of fine tuning will produce what you need. Consult a professional once you
have had a really good go at your forecast. Cashmanager RURAL offers lots of tools that will
help them validate your estimates.
General Ledger accounting software
General ledger software is not designed for cashflow forecasting. Some allow totals to be recorded
against income and expenditure. But they dont cover items that come below the Net Profit, such as
drawings, debt repayment and capital. A month by month bank balance after GST is most unlikely.
Spreadsheets
If you have the skills, these are useful because they save a lot of maths. But they are not a patch on
Cashmanager RURAL!
Note these points:1. Dont use a spreadsheet built by someone else.
2. Structure your forecast so it relates to codes your transactions are recorded under.
Mismatches can cause major headaches when you wish to validate against last year, or later
when you wish to replace the first months with actual data.
3. Keep it very simple, any complexity risks errors. Its a fact many business go bust because of
unknown errors in their spreadsheets.
4. Try to design it so the information will be easy to use for management decisions during the
year.
5. To be useful you must be able to validate your forecast against last year, your gut feeling and
benchmark figures. The more detail you have the easier this is.

Summary
Forecasting under the same structure actual data is recorded, is very important. It is this feature
which allows quick and reliable validation whether planning forward or reviewing backwards. A good
forecast will require several short sessions to get it fine tuned. And when you think you have a plan
that will work, consult an advisor and seek their advice. Its time and money well spent.

March 2009. CRS Software Ltd, Masterton NZ. Ph 06 3700280.

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