Three Steps To Actively Managing Farm Cash Flow

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For any business, cash is king. Cash is the fuel to drive day to day activity across all businesses across all markets across the world. Agriculture is no exception.

As the owners/managers/entrepreneurs of dynamic, ever changing agricultural systems, farmers need to actively manage and monitor their cash flow. Unfortunately, for many, this valuable time is often misplaced. All agri systems are subject to price volatility, inherent weather & disease risk coupled with a myriad of external business challenges. As price takers, farmers undoubtedly have much to manage. Cash flow planning can more often than not get lost in the midst of the day to day activity. The preparation and active monitoring of a cash flow budget is an invaluable discipline which long continues to benefit the farm and family after the initial preparation.   Farmers should set time aside each week/month to monitor cashflow. This time is as important as other farm tasks and should be prioritised rather than left till late at night.

Three steps to actively managing farm cash flow are:

1: Detail all sources of income and expenditure. Take the time to consider all farm & family sources of income and related costs as an accurate cash flow is imperative. Re-visit invoices, receipts and bank statements to have all associated information to hand. Take the time to document all sources and uses of cash for both the farm and household. It is important to also include all new or anticipated cash inflows or outflows for the year ahead.

2: Prepare the cash flow on a monthly basis and take the time to consider the cash inflows and outflows in each month. The cash difference between net inflows & outflows should reflect the farm current account balance at each month end and in many cases may suggest the requirement for a farm current account overdraft to meet cash flow requirements. Detailed analyses might suggest that planned expenditure should be deferred to another month where a greater cash surplus exists. Alternatively, a planned expenditure might be postponed due to cash flow constraints. Where a cash surplus is predicted, perhaps a lodgement to a ‘rainy day’ fund is warranted.

3: Continue to actively revisit, monitor and amend the cash flow. A cash flow is only of benefit to the farmer if it is accurate and reflective of day to day changes in the farm system. Challenge the figures and understand the relationship between months. Unfortunately for many, once the cash flow is prepared, it is often shelved and forgotten. For maximum use and efficiency, the cash flow should be revisited daily/weekly/monthly to monitor actual inflows and outflows against those originally budgeted. Don’t be afraid to amend included figures as the farming year progresses. Forewarned is forearmed. Take comfort in the fact that once the cash flow is initially prepared, it becomes a much easier, more enjoyable process when revisiting the existing document.

 Drivers of change in cash flow

The dynamic nature of agriculture involves a multitude of moving components. Farmers must be proactive in managing their cash – delays in spending when prices are low and new investments when continued surpluses are shown. Without an accurate cashflow, these financial insights will not be gleaned. There are of course a number of drivers which will affect cash flow depending on the stage of business growth and life cycle. These include:

  • Technical efficiency: improvements in performance v deterioration in performance. Documentation and tracking of farm Key Performance Indicators (KPIs) will highlight improvements or deterioration in farm productivity. Examples include total grass grown, grass utilisation percentage, milk solids/ha, kill out percentage, yield/ha.
  • Stage of business development: expansionary phase v period of consolidation. Expansionary phases will require significantly greater cash flow and investment than periods of consolidation. Cashflow is critical when in an expansionary phase.
  • Number of family dependents and their age: primary school v third level & the costs associated with family living expenses. Personal drawings/family wages from the farm will vary with the age and number of dependents. As bank loans range from short to medium to long term, the requirement for living expenses must be considered over the life of the loan.
  • Extent of farm debt: existing level of debt and associated repayments v additional debt. All existing debt repayments must be included in the cash flow including lease repayments and personal borrowings (where appropriate). Loan repayments should be stress tested to allow for an increase in interest rates over the life of the borrowing particularly for longer term loans.

As farmers take stock of 2017 and actively prepare for 2018, it represents a good time to set new objectives. Grassland management, calving challenges, breeding plans, crop rotations, nutritional requirements, labour demands and efficient resource allocation must be managed in pursuit of farm profitability. Take the time to include cashflow budgeting in this active planning stage. A New Year offers many exciting possibilities including a ‘New Cash Flow You’.

Good luck!

 

Comments 1

Fionan Murray on Friday, 09 February 2018 10:49

Great post. In the downloads section, we have a whole range of templated excel spreadsheets that anyone can download and use.

https://www.business-achievers.com/downloads

They're on cashflow, expenses, payments, P&L, receipts, sales and profit


(Im not a farmer, so not fully sure if fully relevant - built for SMEs)

Great post. In the downloads section, we have a whole range of templated excel spreadsheets that anyone can download and use. https://www.business-achievers.com/downloads They're on cashflow, expenses, payments, P&L, receipts, sales and profit (Im not a farmer, so not fully sure if fully relevant - built for SMEs)
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