Cash flow: What can I do if money is tight?
By James McDonnell, Farm Management Department, Teagasc, Oak Park, Co. Carlow
What will you remember 2018 for? Will you want to remember it? For farming folk, it has been a difficult last 12 months.
We had hurricane Ophelia last October, snow in March, a dry summer, a fodder shortage in spring and another around the corner on some farms.
Those from Limerick will remember the All-Ireland. However, farming is a tough business.
Charles Darwin, the famous scientist, said: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
In the meantime, we must plan ahead; farm finances are the best place to start. The current farm financial position is a true reflection of the farming operation.
It can be difficult to motivate yourself to sit down with a pen and paper, but the time will be well spent. The initial aim is to predict what will be your bank account balance on December 31, 2018.
Cash flow planning
Money (cash flow) management is central for a successful business. In good price years, it is important that money is managed to build a reserve and to undertake necessary on-farm improvements.
In poor price years, money must be managed to ensure that all essential bills are paid (including living expenses) and that no long-term damage is done to the business due to a shortage of money.
Creating a budget can appear like a daunting task. Regular budgeters probably use specific worksheets or computer programmes, but you could use a blank page.
Teagasc has developed a simple one page sheet called the ‘5 Minute Cash Flow’. This is available from offices or by clicking here.
A simple method is to divide a page in two. List all income due to be received down the left hand side to the end of the year.
On the right hand side, list all expenses due before the end of the year. Total up both sides and subtract expenses from income.
At the end, there will be either a surplus or a deficit. Take this figure and adjust your bank balance by this amount. This final figure is your estimated cash flow on December 31, 2018.
What can I do if money is tight?
The main priority is to minimise all non-essential spending until cash income improves. The following are some pointers:
- Prioritise essential living expenses;
- Eliminate all non-essential expenditure – both farm and personal spending;
- Review financial repayments. Perhaps a payment could be skipped and added to the end of a loan; this needs agreement from the lender;
- Review monthly pension, savings and life assurance payments;
- Talk to your accountant now regarding tax due in October;
- Involve all family members in analysis and finding solutions where possible.
Let’s also look at the other side: Can extra cash be added into the budget to reduce the deficit? The following are some suggestions:
- Sale of trading stock or surplus breeding stock. However, it is better to try and avoid selling core breeding stock;
- Sale of non-essential machinery;
- Cash in policies or savings; take advice from your broker and accountant on this;
- Is it possible to get some or additional paid employment locally?
- Examine the sale of assets in extreme circumstances;
- Look into availing of social protection payments, such as: farm assist; family income supplement; or pension entitlement.
There are many forms of credit available, such as: bank overdraft; co-op; and local supplier. However, some are more costly than others.
Be careful where you get your credit, as some forms don’t just have a financial cost. If you leave a key supplier waiting – for example, a vet or contractor – they may leave you waiting at a key time.
It is important to consult with all suppliers as to how they will be paid. In general, the banks are the cheapest source of credit, as it is their business to lend money.
As part of the lending criteria, they will assess the risk of lending to you. This risk assessment should work in your favour, as you need to back up your lending application.
Act early – even the best plans and schedules need adjustment. Delays could cause the situation to deteriorate and cause stress.
Be realistic and up front when developing your cash flow plan.
Consult and draw up a plan with your Teagasc advisor, agricultural consultant or accountant. They have the expertise and experience to help you develop a cash flow plan for your business.
Decide on a course of action. Use your cash flow plan to form the basis of negotiations with suppliers and banks. Creditors respond best to realistic budgets and up-to-date cash flow projections supported by your own records and accounts.