Improving your Financial Fitness can help manage tight margins
Having a good feel for the farm finances and what is happening on a farm or farm household is critical. This applies whether a farmer is expanding or just wants to ensure that they are in a good position to deal with whatever arises. Kevin Connolly, Teagasc Financial Management Specialist has advice
There are a few key questions to consider when assessing your financial fitness for the remainder of 2021 and beyond. The questions get longer as we go down the list but the answers are straight forward yes or no answers in each case.
- Do I know my costs of production?
- Do I know my current cash flow position?
- Have I put estimated figures on the main cash in and cash out for the rest of 2021
- Is there a cash reserve/ rainy day / emergency fund available if current cash flow tightens?
The common theme running though these four key questions is cash flow. Managing cash-flow well is the best insulator available against price “shocks” for a business. Not being financially and particularly cash flow aware can affect profitability as well as posing a significant distraction in terms of day-to-day management of the farm and the household. Key to giving you a feel for how to navigate the second half of 2021 and into 2022 with some level of confidence is an understanding of what is likely to be your net cash flow standing at key intervals (end of every month or at least every quarter) during the next six to nine months. Looking forward nine months from now for a spring calving herd is useful as it will bring you out the other side of the dry period to when income from milk sales in 2022 will once again start to flow. What we are essentially talking about here is a cash flow budget.
Preparing a cash flow budget is not or never will be an exact science. Farm product & input prices are always on the move and there are always unexpected jumps & falls in both, which can throw the best thought out plans off the rails. The important thing is not to get bogged down in the detail but to map out the main money movements and take it from there. What we look to do in a plan is to make our best attempt to weigh up what might happen with money flow and then use this to compare against what actually happens during the year.
Volatile market conditions combined with unfavourable weather conditions can have a severe impact on and ruin plans on farms. There can be major implications for cash flow and have major implications for cash flow.
Some advice from Teagasc Head of Farm Management and Rural Development and farmers on managing cash flow
Budgeting – time, place and tools needed
The time: Set aside time during the day for this job – don’t leave it until the late evening. These types of jobs always look better in daylight. Set aside an hour or 1½ hours to start with. If you get a head of steam built up and feel its coming together very easily then keep going. If you’ve had enough after the 1½ hour stint, then put the budget to one side but make the promise to come back to it as soon as possible.
The place: Set yourself up to do this beside where you have the farm records kept i.e. close to the filing cabinet. You will need to be able to easily put your hands on bank statements, sales dockets or statements, cheque books & invoices.
The tools needed: You have options here – you can stick to the pencil, paper & calculator which will be favoured by many. Teagasc have a useful Cash Flow Budgeting worksheets here available to download. There are a few computer programmes available to assist in cash budgeting and also cash recording and Teagasc has it’s own Microsoft Excel based tool for this – the Cost Control Planner. Further information on the planner is available by clicking here
Getting the budget started
The biggest obstacle to preparing a budget is often the start. Looking at a blank sheet of paper or a blank computer screen and trying to work up the courage or enthusiasm to put a few figures down can be the biggest stumbling block. What are the money-in and money-out items that you know are going to happen at certain times of the year? – some examples I can think of here are
- Basic payment/ Other Direct Payments
- Electricity/ Phone payment
- Insurance for farm & vehicles
- Accountancy & advisory fees
- Land lease or rental payments
- Labour costs
- Loan repayments and machinery lease or hire purchase payments
- Family drawings including mortgage payments, health insurance & pensions
Plug these into the budget in the month you think each receipt or payment will take place. Use your knowledge of what happened in the year just gone by as a guide. Don’t worry about trying to predict what the figures will be with 100% accuracy. Just get a figure down for each item and move on to the next one. Some of these transactions will be more or less the same as last year in both their timing and the amount.
Including a figure for farm sales is going to have the biggest impact on most budgets. The cash figure you put in for sales in each month is going to be determined by the amount sold and the price received. There will be estimation required for both of these but you should be able to make what is called an educated guess. For the volume you can base your prediction on the number of litres, animals, tonnes sold last year and change it up or down based on what you plan to sell for the year ahead. As regards the price this is going to be another guess – try to base it on what is realistically likely to the farm gate price. When deciding how to split the euro sales figure across the months then again use your knowledge of the way sales went in previous years to guide you.
Tweaking the Budget
Your completed cash flow budget should be a plan of how you predict money is going to flow in and out of the business (through your bank account, merchant account or pocket) during the year. There will be months where Net Cash Flow (NCF) will be positive (always a good thing) and no doubt other months where NCF is negative (not so good but not unexpected in certain months). These ups-and downs in NCF will feed through to the monthly Current Account balance which is a measure of your available funds to run the farm from month to month. Showing a red (negative) current account balance in certain months is not unusual could easily happen towards the latter end of 2021 on some farms. However if your budget shows up months where there is clearly a lot more going out in payments than is coming in via receipts then you should take a closer look to see if you can better manage the money flow to try and reduce the monthly cash shortage.
Some options to look at here include.
- Rearranging loan repayments so that they are made in months where there is more cash coming in – the months of October to December normally show a lift in money-in due to the basic payment so some of the major repayments could be left to that period of the year
- For large merchant account balances, make a staged payment over a number of months rather than a full payment. This is provided your supplier is in agreement and won’t change any interest for late payment
- Arranging that any saved funds siphoned off during the year can be fed back in to boost cash flow in months where actual cash flow is tight.
Records for you to use
The cash flow budget is a plan and like any plan for it to be effective you need to refer to it on a regular basis. You also need to measure your progress against it and that is where cash flow recording comes in. A lot of records that are kept by farmers are there for others to inspect. Your cash flow budget and cash flow record is one set of records that you will be inspecting yourself.
You are the inspector of your cash flow budget and cash flow record
Recording your cash flow on a regular basis
- should be done by YOU,
- for YOU and
- YOU should use it to help set your farm on the right track for the next 6/9 months.
By recording against the budget you can monitor your progress and assess if your cash flow is proceeding as planned in the budget. There will be differences and that’s when it is important to take note and reassess
- Is the difference due to a “wide of the mark” budget?
- Is the difference due to something beyond my control – an unexpected price change or emergency spending need?
- Is there something which was or was not done which caused the actual not to match what was budgeted?
- Do I need to recheck the overdraft or stocking loan requirements as a result of the difference to ensure they will cover any increased shortfall of cash?
- Can I make any changes for the next few months which will bring the actual back in line with the budget?
By challenging yourself to come up with answers to these questions you will be well on the road towards managing your farm business for maximum profit. This will ultimately ensure that your business will remain viable by generating enough cash to meet your daily requirements for cash for both the business and the farm family.
If you liked this article you might also like to read Cash flow on farms