9 key steps to knowing your numbers
Over the past few months I have been talking with a number of different rural business owners and it’s interesting to see the vastly different mindsets they each have even when they are in the same industry faced with the same challenges. A big contributor to their mindset (and therefore demeanour) is a result of how much they feel in control of their business.
Those that don’t look deeper at their business, the numbers and budgets, work on some pretty rough benchmarks. When the outlook looks poor (as it did for lamb prices coming into Xmas) it’s easy to fall into the trap of constantly talking general doom and gloom. On the other hand, those business owners that have run a few budget scenarios at different prices, have a range of GFIs (Gross Farm Incomes) and have a good idea of where they will end up, are able to make decisions about what costs they need to continue with and which ones can be deferred for different scenarios.
As business owners you need to know how much cash your business can make in a good year, average year and poor year and therefore what cash is likely to be available to invest or reduce debt. If you run these scenarios and know for example in a poor year, where your GFI drops 20%, you go backwards $40,000, then you can ask yourself, is that sustainable in the short term? Or if it becomes the new norm, what changes can you make.
The mindset of the “numbers-savvy” business owner in tough times then becomes, for example “yes, prices are back… I’ll break-even this year and my debt won’t reduce but I’ll still make enough to cover my living costs and the crucial inputs to my business. I’ll ride out the lows okay and capitalise on the highs.” If I were to put it simply, it’s about having clear expectations about what your business can produce and monitoring it regularly.
At the SmartFarming Expo last year, I talked about the 9 Actions to Knowing your Numbers. They are designed to help you gain more control of your business:
1. Make sure you complete your own budget
2. Update and revise your forecast regularly and compare it to budget
3. Benchmark your farm against prior year and similar farms
4. Annually review performance against Key Performance Indicators
5. Convert tax accounts to management accounts to get a true measure of profit
6. Look at your business financial model to understand your financial position
7. Complete your own stock reconciliation and update it throughout the year
8. Utilise technology to scenario plan and increase efficiencies in your business
9. Involve your team of consultant, banker and accountant and if there are gaps in your knowledge, seek assistance.
Keep an eye out for my next post where I will explain how you go about understanding your business financial model. If you’ve ever asked yourself the question, “I made all this profit, where has it gone?”, then this will be for you.
