Five steps to managing cash flow through 2020
Type Media Article
Every dairy farmer should evaluate their business to ensure the effect of the current uncertainty in markets is minimised. Laurence Shallooand Patrick Gowing, Teagasc Moorepark have some advice and guidance
Up to recently milk price and dairy markets had looked extremely positive for 2020 with global demand outstripping supply- COVID-19 has changed that. Currently there is uncertainty over future dairy markets and milk price as well as livestock sales for mixed enterprises. It is for this reason that every dairy farmer needs to now evaluate their business to ensure the effect of this interruption is minimised. The potential of a lower milk price will impact every farm differently due to the different cost structures and level of performance across dairy farms. This article outlines the five steps that you should take to make sure your farming business is resilient throughout 2020.
Step 1: Calculate the Breakeven Milk Price
The breakeven base milk price (3.3% protein and 3.6% fat) is the milk price required for your business to be in a neutral cash position for the year, where the cash out and cash in for the farm business including family drawings, bank commitments and taxation are equal. If your breakeven milk price is above what you expect milk price to be in 2020 (using a conservative estimate) there is a requirement to take action immediately within the business, if it is below the expected milk price there is less urgent action needed.
Step 2: Develop a Cash Flow Budget
Using 2019 information (bank statements, farm accounts, own records etc.) a cash flow budget can be created that reflects your income and costs for 2020. You will have to make adjustments in relation to milk supply and additional or reduced costs, etc. Obviously you will have to make some assumptions around milk price – we recommend that you take a conservative view (if milk price is better than planned, that will be a bonus).
Step 3 – Scrutinise Costs
Now is a good time to evaluate all expenditure to determine how it is contributing to the bottom line on the farm. Check grass growth figures on your farm. Is there scope to reduce feeding levels on farm (albeit ensuring calmag minerals are being offered). In every cost category the same approach should be taken with a key focus of taking out costs. Overall the businesses that are most resilient at lower milk prices are the businesses that have lower cost structures.
Step 4: Capital Expenditure
If planning capital expenditure in 2020, this should only happen if the cash flow budget suggests that it can be facilitated. If there is scope within the budget to do only some of the planned investment, priority should be given to investment that will give a high return (e.g. soil fertility status, reseeding). However if the budget suggests that even investment in these core parts of the business is not possible, this investment should be put off until the budget permits.
Step 5: Bank
As has been said many times before banks do not like surprises. When talking with your bank, they will require cash flow projections showing any potential shortfall you may have. Options with banks include deferring capital repayments, increasing overdraft facilities or retrospectively financing capital investment that was completed from cash flow. At farm level, there tends to be a reluctance to take on debt over longer term time horizons. A key focus of any individual restructuring completed now should ensure that the debt repayment period is appropriate for the business and the investment.
If you require help in completing any of these exercises, you should talk with your accountant, farm financial advisor or Teagasc advisor.