Like many businesses, farm enterprises face challenges that are outside of their control, writes CAFRE’S Jason McFerran.
The cost of inputs and the price received for produce that is sold is controlled to a large extent by market forces.
It makes sense to review all expenditure to ensure it is both necessary and good value for money. A good starting point is to look at your farm bank statements.
Take a fresh look at each direct debit. Are you paying for a service you don’t use? If the answer is yes, then consider cancelling, but check first in case there is a notice period required and/or cancellation fee.
If you do make use of the service, make sure it is a net benefit to your business by either adding value or saving you more than it costs.
If you’re not the book-keeper in the family, take some time to review invoices to keep up to date with current input costs. Are you getting value for money? Have you priced around? Could you reduce quantities purchased? By looking at the costs it may highlight the areas to focus on within your business.
When margins are low or you are under financial pressure, a cash flow budget should be completed.
What is cash flow?
Cash flow is simply the movement of money into and out of your business. It is possible to get a good idea of the farm cash flow by looking at the monthly bank balance.
However, any cash-only dealings must be included as these are not shown on the bank statement.
Cash is essential for farms to meet monthly running costs. It allows you to pay the bills, including tax, cover the cost of repairs and make essential improvements.
In the long-term, a business with more money going out than coming in cannot keep going.
Doing a cash flow budget
A cash flow budget is simple to do. It is a forecast of the money that is expected to be received and spent over a certain period of time, usually the next 12 months.
It helps you build a timeline and plan for the future. It should include realistic estimates of production levels, prices and timescales.
Cash is needed throughout the year but is not spread evenly as there are certain times in the year when large expenses, such as conacre or contractor bills must be paid.
In the same way, some farm enterprises bring in sales receipts at different stages throughout the year.
The budget shows the difference between money coming in and money going out each month and the knock-on effect on subsequent months. It highlights times in the year when borrowing money may be necessary to keep the business going until sufficient income is generated.
It also shows when peak borrowing will occur. This allows you to know your maximum requirement for a bank facility.
A bank overdraft is ideal for short-term, flexible borrowing such as this, but not for longer-term borrowing.
Discuss your options
Since the cash flow budget is a prediction of how the year will ‘pan out’, it needs to be regularly monitored and updated; this allows you to take account of such things as changes in input prices, a delay in sales of stock or changing sale prices.
If it looks like there will be a shortfall, it is vital that you discuss your options and don’t ignore the problem.
If additional borrowing is required, approach your bank manager sooner rather than later.
A cash flow budget gives the bank confidence in you and your business and is often required before they consider lending you money.
It also helps you choose the most appropriate source of finance and so maintain a positive cash flow. A cash flow helps give control.
Use the right tools
Cash flow budgets can be done using pen and paper, but using a computer makes it a lot easier.
A spreadsheet may be all that is needed to draw up a simple but effective cash flow budget to provide you with the confidence to manage your finances or discuss the options with your bank manager or accountant.