Managing your cashflow

Volatile prices mean that farmers are often faced with cashflow uncertainty. Depressed commodity prices and adverse weather conditions can combine to negatively impact on the cashflow situation on Irish farms. Managing the cash inflows and the cash outflows of the farm is one of the most important aspects of the farm business, but unfortunately it often does not get the attention it requires. Cashflow is the lifeblood of any business and farming is no different. In an ideal world cashflow would be predictable, but in reality and especially in farming it rarely is. The careful management of the farms cashflow is therefore critical to its survival.

What is cashflow planning?

Cashflow planning involves assessing when cash is likely to come into and move out of your business. It involves planning ahead so as to ensure you have sufficient working capital, to meet the needs of the farm business when required. It is an important tool on farms to ensure there is sufficient cash available to meet farm costs, family living expenses and loan repayments as they fall due.

Benefits of cashflow planning

Cashflow planning allows for better management of the farm finances by helping to identify periods of cash surplus and deficit. It therefore allows you to take the necessary corrective action to deal with any cashflow deficits, while also allowing you to take advantage of opportunities that may arise from cash surpluses.

A cashflow statement will outline to you what your working capital situation is like at present, and likely to be in the short term. If you feel you will need additional working capital at some stage during the year, approaching your bank early before a cashflow problem emerges will make finding the best possible solution for you and your farm business easier.

If you approach your bank with a new funding proposal, a cashflow statement together with cashflow forecasts for the coming year will enhance your proposal by portraying your understanding of your business. It will provide you with better knowledge of your farm finances and this will allow you to structure your loan repayments to suit your farm needs.

How to begin

It is good practice to begin each accounting year with a projected cashflow statement for the coming year, outlining what you think the cash inflows and outflows will be during the year. It is not too late to produce your cashflow statement for the remainder of the year.

We have produced a simple cashflow planner template which can be used to produce a cashflow statement for the year. We recommend that you use the template to plan your cash inflows and outflows for the remainder of the year if you have not already got a cashflow plan in place. This will allow you to get to grips with the cashflow requirements of your farm for the remainder of the year and plan accordingly.

At the beginning of the year it will be difficult to plan for all the cash inflows and outflows that will occur during the year and when they are likely to occur. As such, the initial compilation of a cashflow statement will require some effort in examining farm records. Looking back on the previous year will however provide a good template for planning the year ahead.

Start by examining the income receipts from the previous year. Milk and livestock sales should be easily attributed to an individual month by examining creamery and mart/factory receipts. You should take note of the numbers of cows that were milked and the stock numbers sold. You can then use this information to help predict your cash inflows for the coming year. If you are expanding herd size you may have less stock to sell this year. Prices will undoubtedly change from last year and the weather may impact on sales/production. However, include a price and allocate the cash inflow to a specific month. The SFP will arrive between October and December and include any other payments you expect to receive throughout the year including REPS. Your bank statements will also provide you with a good record of any additional payments/receipts you received during the previous year which are likely to be received again.

When you have examined your income receipts it is then time to take a look at expenditure and all the relevant cash outflows from the farm. Again bank statements accompanied by cheque books will be a good source of information. Examine each individual cheque and try to attribute the correct cost to the relevant areas in your cashflow statement. Your merchant/coop bill can be used to help with this process. You should also examine all invoices and receipts as they may have been paid for in cash. Again, looking back over last year's expenditure is a good start for trying to predict the year ahead. If there are specific times each year that you pay your contractor or your merchant/co-op, include them in the cashflow statement together with an estimate of the cost. Remember these can be easily adjusted to take account of changing circumstances as the year progresses. The important thing is to include them in the plan and amend if necessary.

As the year progresses you should record the cash inflows and outflows as they actually occur in the cashflow statement. A comparison of the projected and actual cashflow will enable you to see if things are going according to plan and if not, to formulate solutions for unanticipated problems or take advantage of favourable circumstances. It is important that at the end of each year you complete your cashflow statement, review the document and make use of the information contained in it.

Your first cashflow statement will probably be the most difficult to prepare and the least accurate. It may be beneficial to enlist the help of a professional with your first cashflow statement as predicting cash inflows and outflows can be challenging. Remember the success of your cashflow analysis and benefit of your cashflow statement will depend on the accuracy of the information used. The process of cashflow planning will get easier, the information produced should get more accurate and the benefits should be greater in each subsequent year.

Information a bank may require from you when assessing a loan application

• A farm business plan including details of farm finance required, its purpose and proposed repayment schedule. Ideally the plan would include income and expenditure projections and cashflow budgets.
• Up-to-date financial accounts for two to three years.
• A farm profile including details of land farmed, production system, livestock, farm machinery and existing financial commitments.
• There may be other information required by the bank if some of your accounts are contained with another financial institution such as up-to-date bank statements.

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