By Dr. Anne-Marie Butler, Agricultural Manager at Ulster Bank
For any business, cash is king. Cash is the fuel to drive day-to-day activity across all businesses, across all markets and across the world. Agriculture is no exception when it comes to cash flow.
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 agricultural systems are subject to price volatility; inherent weather and disease risk; and 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.
Farmers should set time aside each week or month to monitor cash. This time is as important as other farm tasks and should be prioritised rather than left until late at night.
Three steps to actively manage farm cash flow are: detail all sources of income and expenditure; prepare cash flow budgets on a monthly basis; and continue to actively revisit, monitor and amend the cash flow.
1. Detail all sources of income and expenditure
Taking the time to consider all farm and family sources of income and related costs as an accurate cash flow is imperative.
Revisit 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. Preparation on a monthly basis
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 and 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.
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
It’s 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, it 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 cash flow, 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; stage of business development; number of family dependents and their age; and extent of farm debt.
Technical efficiency: Improvements versus 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 per hectare; kill out percentage; and yield per hectare.
Stage of business development: Expansionary phase versus period of consolidation
Expansionary phases will require significantly greater cash flow and investment than periods of consolidation. Cash flow is critical when in an expansionary phase.
Number of family dependents and their age: Primary school versus third level
Personal drawing and family wages from the farm will vary with the age and the number of dependents. As bank loans range from short, medium and 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 versus 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.
A good time to set new objectives
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, crops rotations, nutrition requirements, labour demands and efficient resource allocation must be managed in pursuit of farm profitability.
Take the time to include cash flow budgeting in this active planning stage. The New Year offers many exciting possibilities, including a ‘new cash flow you’.