Budgeting in an Uncertain Environment
Phil Kenkel
Bill Fitzwater Cooperative Chair
In last week’s article I discussed the year-to-year variability in producer’s grain marketing and
storage patterns. Those patterns impact the accuracy of the cooperative’s budget since most
cooperative project monthly storage income on the previous year’s pattern. That is just one
example of the difficulty in budgeting in an uncertain environment. The size of the harvest is
obviously the largest uncertainty. One approach is to forecast receipts on the average volume
from the previous few years. An analysis of county data shows that an average of the previous
three years would have under-estimated wheat receipts by 50% in 2003, and 10% in 2004, and
over-estimated receipts by 8%, 53% and 11% in 2005. 2006 and 2007 while again severely
under-estimating receipts in 2008. Using a long-run average would not have predicted much
better.
Because most cooperative operate off of unit margins, the price levels of grain, fertilizer and
petroleum don’t have a one-to-one impact on revenues and net savings. Price levels do impact
cash flow and working capital, a fact that managers remember well from last year. Forecasting
price levels a year in advance for budgeting purposes is also a difficult proposition. Fortunately,
many other budget categories such as payroll and overhead expenses are somewhat stable.
The best response to these budgeting uncertainties is to prepare several budgets. For example, a
budget based on a favorable harvest, average harvest and below average harvest can help the
board and manager plan in an uncertain world. The budget balancing process typically impacts
decisions on cash patronage, equity retirement and fixed asset purchases. Preparing contingency
budgets allow you to think through possible changes for both downside and upside risks.
The other tool to managing in an uncertain environment is to update budgets as the year
progresses. Obviously times to update would include after harvest when grain volume is known
and after fall fertilizer season when at least a portion of fertilizer revenue has been determined.
Most budgeting processes base the inventory to sales ratio and accounts receivable to sales ratio
on the previous year. A mid-year reality check on those budget lines can help assure you that
your cash flow and working capital projections will remain on track.
The Greek scholar Heterdotus said that great deeds and usually wrought at great risks. Under
that criterion cooperative mangers have lots of opportunity for great deeds.
11-6-2009