Annual Cash Budget (9-1)
The basic principles of management are planning and control by monitoring. The management
of income and expenditure in the business is called Financial Planning or Budgeting. A sound
financial plan is essential to ensure the success or viability of any business; whether an existing
business, a business you are considering pursuing, or when considering various business
options available. An Annual Cash Budget is used to provide an estimate of the cash income
and expenditure expected to occur over a fixed period, normally the financial year.
What is an Annual Cash Budget?
An estimate of all the cash income and expenditure you expect over a 12 month financial
year to assist with tax planning.
The actual cash surplus or deficit you achieve over the year is reflected in the change in
your bank account/overdraft balance.
Why prepare one?
Cash is the lifeblood of any business and the lack of it is the main reason why some farm
businesses fail
It is the basis for preparing your cashflow budget. The cashflow budget is monitored
monthly to ensure your annual cash surplus target is reached (see Farmfact 9-2)
Assessing new proposals/new ventures (are they viable?)
Lending organisations require a budget for borrowing purposes
How to prepare an Annual Cash Budget?
Firstly estimate the income your business is likely to generate for the year ahead, and the
expenses it is likely to incur.
Use your last two to three years’ sets of financial statements from your accountant as this
will tell you your actual spending habits. Budgets prepared without using historical
accounts generally overestimate cash surpluses. If you do not have these, refer to the
latest DairyBase Economic Survey, or ask your bank manager or accountant for average
farm expenditure.
Be conservative in the way you budget. It is better to underestimate production and
payout expectations, and overestimate expenses. Then deliver above your expectations.
A common mistake is that people assume they will not have any unexpected capital
expenditure, for example, a quad bike, tractor, or washing machine. Allow for unexpected
items that have to be replaced or repaired if they break down.
The annual cash budget is an estimate of cash income and expenditure expected to occur over
a given period. The budget is not a measure of the profitability of a business, but rather if the
business is sustainable in terms of income and expenditure.
It can be defined as “a medium through which farm plans can be formulated in relation to
probable financial results”. The budget will give an estimate of the financial position over the
year, but the primary function of the budget should be seen as an aid to decision making and
the formulation of sound management plans for the business.
Updated April 2014
Farmfact 9-1
Updated April 2014
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The completed budget can identify current management problems, and also highlight
opportunities by measuring financial performance.
The Cash Surplus or Deficit
An Annual Cash Budget will tell you if you can expect a cash surplus or deficit at the end of the
season. A successful and profitable business will always set some guidelines for the cash
surplus they wish the business to deliver.
If your budget indicates a cash surplus, you need to ask yourself how you will use this cash
surplus. A surplus allows choices to be made between reducing debt, investing back in your
farm business, off farm investment opportunities or higher drawings. These decisions should be
made in line with your personal and business goals.
If your budget indicates a deficit you need to ask yourself some hard questions. What is the
major issue here? Is it lack of production and therefore income? Are farm working expenses
too high? Is the financial structure and funding of the business too highly geared? Are drawings
too high? Do I need to make major or minor changes to make this budget work? If the
achievements of all of your objectives for the year are not possible, then decisions need to be
made between all stakeholders as to where priorities lay, and the plan can be changed
accordingly.
What if scenarios?
Once you have completed a budget, it is useful to look at how sensitive your forecast is to
changes. Carry out some “what if” or sensitivity scenarios. e.g. What would happen if your
production dropped by 5 or 10% due to drought? If payout drops by 10 or 20%? If major
expenses spike upwards? This planning will help you manage the risks to your business.
Some helpful resources for budgeting:
Obtain a good budgeting template e.g. a commercial product such as Cash Manager
Rural, or ask your banker, accountant or farm consultant.
Alternatively download an Annual Cash Budget template or excel worksheet from
www.dairynz.co.nz , along with a more detailed Budgeting guide.
Contact your Dairy Company to obtain Advance Payment Rates Schedules or if
appropriate www.fencepost.com Payment Predictor in Tools and Resources
Use your last two or three years accounts as a basis to start the budget or obtain
estimates from:
DairyNZ Economic Survey
Your bank manager, accountant or farm consultant
The Lincoln University Financial Budget Manual
Your local Consulting Officer
Farmfact 9-1
Updated April 2014
Page 3
Annual Cash Budget (example)
Updated: April 2014
©DairyNZ 2014