Our Insights

Don't just dump your budget with the bank!

May 21, 2020 10:53:12 AM / by Andrew Laming

Don’t just dump your budget with the bank – You’re missing a golden opportunity to showcase your business and control the terms of your lending.


Don’t fall into the trap of just sending your budget to the bank- as we guarantee you will sell yourself short as a result and it will leave some key things to chance in the credit process.



So, as far as you are concerned you’ve prepared your budget.  You’ve decided on payout, you’ve got some assumptions, it has spit out a cashflow and shown what you’ll need for working capital.  Job done, right?   WRONG!


If that’s your process for setting the budget, you are missing a monumental opportunity to showcase to your bank the full potential of your business and its true governance capability.


This is the time of the year your bank is reviewing your loans.  They will do this based on the information you provide, and they’ll use this information to determine your lending conditions, as well as the price you pay (interest rates). Sell yourself short with what you present to bank at this time and you sell your entire business short in terms of getting the right funding package to suit your business.


The single biggest mistake we see in budgeting is made right at the outset – where farmers see the process as limited to a box ticking, must do for banks - rather than for the invaluable exercise for business review and setting strategy that it should be.


You should be doing this for the health of your business - not for your bank. Going through a process like this makes you reflect, celebrate, learn and therefore enhance your farming business.


Hopefully this is already leading you to reconsider simply passing on the fate of your budgets to the bank?


Keen to take back the reins?


The below items are not by any means a conclusive list of all things you should cover, but just a quick snapshot of some of the important considerations when it comes to setting your budgets robustly.    



1. Start by providing a review of last year, including an update on your strategy. Be proud of what you have achieved this year


Start by showing the financial result of your business.  

I’d imagine it was probably quite a good one given the better commodity prices.   Tell them about it!


Whilst there’s the typical information such as your financial result versus the budget, this also poses an opportunity to show what was delivered versus long run average – show the trend line over a few years.


Its not just "cash" progress here but what if you’re carrying lots of inventory over (crops/ stock on hand)?  This is often missed in the banking process, and a poor cash result may be the result of excess stock on hand, so you need to adjust and show for this.


What did you invest in for the year, and what benefits will that deliver in years to come? Did you increase or decrease debt for the year?   


But, don’t just focus on financial items.

What was achieved this year strategically? Provide some insights into what you wanted to achieve at the start of the year and what actually eventuated.  This should be in relation to people, governance, environment, technology and community.


Ideally, you’ll have clear and simple strategy in place already and you’ll be comparing how you performed against that.   But remember, strategies should be agile and responsive to the economic situation - what are you now going to change/ stay the same/ start?.   Show your thought processes here.


Celebrate your wins, whilst also acknowledging where improvement is needed.

Let’s challenge ourselves to review the bad with the good. What are some of the learnings this year that you want to apply to following year?  What are some of the things that you wanted to do, but didn’t?


Also, what was your bank asking of you in your last year’s credit review and messaging? Make sure you demonstrate how you have addressed this.



2. Present this years budgeted cashflow, detail the implications and tell your financier what you’ll do as a result.

Ok, so you’ve got a result, but what does this mean ?

  • Are you able to invest/repay debt as per your pre-agreed strategy?
  • What working capital requirement do you have on the back of this?
  • How long do you need it for?
  • When in the year will amort occur?

Other considerations that should be front of mind here:

It’s important to build the right flexibility or buffer into the budget- i.e. – what does the budget look like at lower payouts/ prices, and  how will you defer expenditure and capital expenditure (be specific here!) until your financial result become more certain? If you're unsure where to start with payout, here is a good place to start.


Compare your budget to last year’s results - where its different, explain why.


What have you used for certain assumptions such as payout, and why?


Do those assumptions hold water, or are they a hope and a prayer?     


Isolate and discuss your biggest risks in here, and what you’ll do to mitigate them if they turn sour.


How often will you review/ re-forecast the position throughout the year – what are your review processes?


Show the longer term position, particularly if this year ends up being below average.

You may also want to consider, at this point, updating your longer term strategic budgeting (years 2-5) to show the business trend over a longer period of time, particularly if this year ends up being difficult for commodity prices

Consider also showing your own “SY/SQ budget” – Bank’s will be making an assessment on your “SQ/SY budget” (their stress test budget) at this point – don’t simply leave that to their own assumptions, particularly if you have been running differing levels of expenditure to what might be a long term position.

Consider how your cashflow this year and in following years fits with longer term capital items – what should you still be flagging as important investment items, for either enhanced productivity or compliance?



3. Be very clear on what you’re asking from the bank

I’ve put this as third on the list but often, when preparing customers’ report to the banks, this is actually where we start.


Tell them what your report actually is and what you’re asking them to do.    Put it front and centre so they know, from the outset, what you are asking for. 


Are you asking for additional working capital?  Are you asking for limits to be retained, loan extended, covenants set and agreed? 


Are you asking for amortisation to be set at a certain amount or timeframes  


There are a lot more questions here, but this part is so important. Letting it go amiss is similar to giving a builder a whole lot of materials and simply saying – ‘build me a house’ – the potential outcomes are wide ranging! Be very clear about what you are actually asking from your bank



4. Use independent professionals as part of this process

We are all at risk of getting tunnel vision right –so it’s important not to operate in a silo with this process.


We’ve seen too many businesses enter this process being either too scared (and presenting a budget that is unachievable) or too confident (and not addressing some very important needs to ensure the business is stable long term).


And whilst we always advocate for the benefits of talking to the bank as part of this process to see what is important in their world and what would they like to see, theirs is not the only “view” you should be taking. 


All banks have differing risk appetites, some of it having nothing to do with your business.  Other businesses may be suffering some subjective “taint” from their bank given past non-performance.  This can hamstring growth and potential.


Don’t be one of those people – use your professional advisers, crap test your thinking, pay others for what they’re good at so you can do what you’re good at.  It’ll be the cheapest investment you make, and come with a huge potential to help take your farming business to a new level.

Tags: Debt, Action, Planning, Budget, Banking, Strategy

Andrew Laming

Written by Andrew Laming