Backwards budgeting brings new focus

Published 18 February 16

Caroline SpencerAt this year’s Positive Farmers conference held in Cork, former consultant and now dairy farmer Caroline Spencer described what happened when her family business had its milk contract terminated unexpectedly, and how a novel ‘backwards’ budgeting process allowed the dairy farm to stay viable. 

Caroline farms in partnership with her parents at the 118ha Volis Farm in the Quantock hills in Somerset. She returned to the farm in 2000 after working in New Zealand, Australia and with the Farm Consultancy Group. Back then, her parents had 140 Holsteins and grew wheat and maize but both milk and wheat prices were low and a number of changes had to be made to the enterprise for it to remain viable. 

She said: “We took a hard look at costs and changed our system, eventually expanding to 280 spring calving Jersey cross cows, rearing all replacements. When I was invited last summer to speak at this conference, I hoped to come and talk about the ‘nuts and bolts’ of budgeting, what we’d done and the ‘next stage’ of our journey – setting up a second unit in partnership with our herd manager. 

“But that was before our business was suddenly served six months’ notice by our milk buyer, who was shutting down their cheese factory. Faced with selling seasonal milk on the spot market, the focus turned to whether we could remain viable at all,” she explained. 

Budgets needed to be updated to see whether the farm could chart a safe financial course through volatile markets. But, she said, it was the approach to budgeting that made the difference. 

“Budgeting is a chance to make mistakes on paper, not in reality. It’s our map to reach our destination and cope with this volatility. So I started with a clean sheet – a zero balance; I didn’t copy anything over from the previous year. 

“Secondly, I worked backwards. I started with the cash surplus I wanted – and needed – to keep the business out of trouble, which could either be withdrawn or knocked off the overdraft at the end of the year. Sounds obvious but how many of us do that in reality? Our cash surplus can be the first ‘luxury’ to be foregone and budgets are often just used to placate the bank.” 

An example, she explains would be a detailed calculation of total expected income – milk, stock, grants – minus the cash surplus needed, leaving a clear picture of what is left to spend. 

“Then I scrutinised all the costs, starting with the non-negotiables, like personal drawings and paying the taxman, bank and landlord. After that, all other costs are variable. I compared everything and challenged all of our assumptions.” 

At the end of this process, she said, with the spot milk price she would have had a deficit, leaving no cash surplus and having to increase the overdraft. So what next? Caroline said a book by James Kerr called Legacy, examines what the All Blacks rugby team can teach us about life. “It tells you to ask and re-ask questions. What might happen if…? In the game of rugby you have to assess, reassess, adapt to change very quickly and ‘go for the gap’. 

“So following this logic, we went back to the budget. What could we take out? We’d found our discussion group an excellent sounding board in this – they were an outside eye, as was our herd manager. 

“A list of possible savings can always be identified, for example, postponing liming and P&K applications; moving from compound feed to straights; using cheaper forages instead of maize; reducing the tax bill by the getting accounts in early and so on. We also operated interest-only borrowing, where we only pay back capital in good years; this was a year to request a repayment holiday. So we kept re-budgeting until the figures added up.” 

Caroline said a ‘very wise’ farmer from Pembrokeshire commented to her many years ago that when things get tough, it’s not how far you fall but how high you bounce back. “I’ve never forgotten that, so I make sure we have a culture of questioning and challenging, finding a solution and going for the gap. Bank the cash in the good times but always be prepared for volatile times– it’s happened before and will happen again. 

“And most of all, don’t break your relationship with your bank. They have discretion; if you’re on top of your budgeting and you’ve got a good track record, they can justify supporting you.” 

So what happened with the milk contract? Caroline said the business went through lots of scenarios – leasing out the cows, mothballing the dairy and putting the farm down to arable. But these hinged on the farm being TB-free, which it wasn’t. However, just before Christmas, they were offered and signed a contract with a local cheese company. “That means we’re out of the spot price scenario but the lesson is to always have a Plan B. Anyone could end up like us, without a milk contract, so plan for the worst and hope for best.”