Now is a good time to assess your cash flow
Hopefully the bad weather of spring 2024 is behind us and we will move into more favourable weather for the remainder of the year. Now is a good time to take stock of where the farm sits and the cash position of each farm. Dairy Specialist, Patrick Gowing gives some guidance on what to do.
To say we have endured a tough period on cash flow is an understatement. The last few months have been about doing the best we could with the conditions in front of us and generally this meant increased feeding with lower milk yield than expected. This has put a strain on the cash position of most farms especially as 2023 was a below average year for profitability as well.
Getting started on cash flow
The starting point for a cash flow is relatively simple. We simply see what cash we have on hand, what is owed to you, for example in a milk cheque or stock sales. Then we add all the money that you currently owe whether it be on overdraft, merchant credit, bank payments etc.
This gives you your starting point on the cash position of the farm. What can be harder
establish for some farmers is how they will be able to pay back the money and when they 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.
Cash Flow Example
To help simplify the task we have developed a mock farm where we completed a cash flow budget for 2024. While I accept every farm is different and will have different commitments it will give an indication of how cash moves through a typical dairy farm which may help you with your own cash budgeting.
For this sample farmer we used the following assumptions:
Average herd size: 115 Cows
Average milk price: 45.64c/l
Average yield: 5,515l
Meal feeding: 750 kg @ €346/t
Drawings: €55,000
Bank repayments: €25,000
Contract rearing: €22,440 annually
Tax: €15,000
BPS: €9,000
Disadvantage: €2,900
All other costs are based on 2023 EPM costs and are adjusted to 2024 unit price.
The farm is spring calving and surplus calves are sold in the spring and cull cows in the autumn prior to housing. The cash flow plan is assuming the farm is starting the year with €0 in the current account and pays for meal as used and fertilizer over the summer months.
As mentioned before this just gives an example of how cash flows through a typical spring calving herd. Each farmer will have to do their own cash flow to get a more accurate picture of their own farm.
Figure 1: Cash position for each month
Figure 1 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 3 months until the milk cheques start to build. The dip in cash flow in June is associated with paying for the first cut. 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.
Figure 2: Cumulative net cash/cow
In this graph we have added the cash position of each month to the following month and divided the total by the number of cows on the farm. This give an indication for the amount of cash or working capital required on a farm. It typically is between €300-400/cow at its peak in March. The recovery starts in April but the farm won’t be in a positive cash position until August.
If the farmer for example 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.
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.
Figure 3: +5c/l net cash/cow
Figure 3 shows plus 5 c/l increase on milk price throughout the year. As you can see its speeds the recovery in the second half of the year but has minimal impact in the first half.
Check your cash requirements
Every farm is different and has different requirements for cash. If you find yourself under pressure for cash flow, know the recovery will come but it may be slower than expected. If you feel that you are further behind than the figure outlined above please seek help early and complete a more comprehensive cash flow budget. Teagasc have a simple 5 minute cash flow template online that can be used as the starting point.