Volatility is now a permanent feature facing every farmer and this requires the farm family to position itself well for continued volatility into the future. Cash flow budgeting is a very effective management tool in this regard.
A cash flow budget is just a month by month breakdown of when money comes in and when it goes out of your farm. It is not to compare with any other farmer and it is a way to avoid nasty surprises.
A hand written cash flow is adequate and it can be done on a sheet of paper simply by putting the months along the top and using a different line by each expenditure item down the side. If using a computer, a cash flow in the form of an excel spreadsheet can be downloaded free. It is very simple and automatically does all the additions and subtractions. Start with what you know.
Firstly enter the balance on the current account at the start of the forecast period and then on a monthly basis, the expected sales receipt e.g. milk cull cows, beef cattle. Also enter the expected single farm payment, VAT refunds and any other likely farm receipt.
When you have the expected income entered then start the expenses side. There are two ways to deal with the expenses. Firstly go through the expenses paid out each month and year and try to assess what is to be paid out each month in the current year. Last year’s invoices and cheque books will act as a guide; it is the month that you pay for the item that is entered in the cash flow.
Secondly, examine last year’s bank statements to pick up direct debits, credit card payments and loan repayments, include living expenses, estimate how much you need to live and enter this as a monthly expense. Some farmers have a separate bank account into which a monthly amount is transferred. The amount of income tax or corporation tax to be paid requires to be included in the appropriate month(s) and this should be discussed with the accountant.
Once all the expected receipt and payments are entered it is the time to step back and draw conclusion. The first question to ask is if the overdraft limit is to be exceeded, even for a short time.
It is good practice to discuss the cash flow forecast with family members involved in the farm and with your accountant before meeting with the bank.
Cash flow forecasting should be a habit on the farm. Once the cash budget is set up, review each month, replacing your predictions with actual payments and receipts for the month.
Armed with a realistic and up to date cash flow, building a buffer and improving efficiencies are some of the best methods of positioning the farm business to cope with volatility.