As the busy spring period moves towards the busy summer period, now is a good time to assess the farm’s financial situation and what cashflow currently looks like on your enterprise.
Teagasc dairy specialist, Patrick Gowing has provided some guidance on what farmers should do in terms of assessing cashflow.
As a result of challenging weather conditions. the last few months have been about doing the best farmers could with the conditions in front of them and generally this meant increased feeding with lower milk yield than expected.
According to Teagasc, this has put a strain on the cash position of most farms especially as 2023 was a below average year for profitability as well.
Where to start
Beginning an analysis of cashflow for a dairy farm enterprise entails seeing what cash is available on hand, what is owed to the farmer, e.g., in a milk cheque or stock sales.
Once that has been determined, the farm owner needs to add all the money that he/she currently owes such as on an overdraft, merchant credit, or bank payments. This will gives a starting point on the cash position of the farm.
It can be a challenge to establish how a farm enterprise will be able to pay back the money and when farmers will have surpluses of cash above their monthly commitments.
This can lead to stress in trying to handle creditors and continue to operate the house and farm at the same time.
Cashflow example
To help simplify the task, Teagasc has developed a sample farm where it completed a cashflow budget for 2024.
While every farm is different and will have different commitments, the example below is aimed at giving an indication of how cash moves through a typical dairy farm which may help dairy farmers with their own cash budgeting.
For this sample farmer, the following assumptions are used:
Average herd size 115 cows Average milk price 45.64c/L Average yield 5,515L Meal feeding 750kg at €346/t Drawings €55,000 Bank repayments €25,000 Contract rearing €22,440/yr Tax €15,000 BPS €9,000 Disadvantage €2,900
The sample farm is spring calving and surplus calves are sold in the spring and cull cows in the autumn prior to housing.
The cashflow plan designed by Teagasc assumes the farm is starting the year with €0 in the current account and pays for meal as used and fertiliser over the summer months.
The graph below shows the cash position for each month. This is taking all cash income minus cash expenses for each month.
As you can see, the farm is in negative cash flow for the first three months until the milk cheques start to accumulate.
The dip in cashflow in June is associated with paying for the first cut of silage.
Gowing said: “While cashflows are often presented like this I don’t think they reflect the true cash position of the farm.
“To do this we use cumulative net cash. This is where we add the net cash of one month to the next to see what is actually happening the net cash flow on the farm.
In the graph above, Teagasc added the cash position of each month to the following month and divided the total by the number of cows on the farm.
This gives an indication of the amount of cash or working capital required on a farm. It is typically between €300-400/cow at its peak in March. The recovery starts in April, but the farm will not be in a positive cash position until August, according to the sample analysis.
If the farmer, for instance, had to purchase silage through the spring of 2024, then the farm may not come into a positive cash position until later in the year.
Teagsac added that if milk price continues to improve, it will speed the recovery but has negligible impact on the cash position of the farm in the first quarter as the volumes are not there.
The graph above shows a 5c/L increase on milk price throughout the year which speeds the recovery in the second half of the year but has minimal impact in the first half.
Requirements
Gowing explained that every farm is different and has different requirements for cash.
While a farm may be under pressure for cashflow, it’s important to remember that a recovery will come, but it may be slower than expected.
Farmers who feel they are further behind than the figure outlined above are urged to seek help early and complete a more comprehensive cashflow budget.