All businesses need money coming in to pay the bills.
Cash is the lifeblood of all businesses and monitoring cashflow is a key part of business management.
For beef, sheep and arable businesses, the money coming in may not be regular in either amount or timing, therefore planning cashflow may be more difficult, but it is still a very important task for the farmer.
For many farmers, if the price falls around selling time, it is difficult to adjust spending as much of the money has already been spent.
A comprehensive cashflow budget will highlight potential borrowing requirements and will help provide evidence to a bank manager that a farmer has the capability to manage finances effectively and repay any borrowing.
There are two key elements of cashflow budgeting. These are:
A cashflow plan is simply a forecast of money going into and out of a business over a specific period of time. The more comprehensive and accurate the plan, the greater the value to the farm business.
What should you include in your plan? The simple answer is everything! Anything and everything that will be paid for in the period, and any money coming in from any source must be included.
The first step is to compare actual receipts and payments (money in and money out) with what was expected or planned.
What are the differences between the plan and the actual cash flows? Did all the bills you expected come in? Were all the bills as you expected, e.g. servicing of a car or tractor?
The second step is to understand why these differences occurred? Were sales less than expected? Was there an unexpected bill?
The third step is to decide what the implications are and what you can do about it. It is vital to identify problems and take action as soon as possible.
Important questions include:
q Can you sell livestock or produce sooner?
q Can you delay payment of bills?
q Can you delay some work for a short time?
q Will you need to speak to the bank manager about overdraft facilities?
q How much extra will you need and for how long?
The best plan is likely to be an annual plan including all monthly payments in and out, updated monthly based on the review of actual versus planned cash in and out of the business.
Summary of key points:
Complete a comprehensive monthly cashflow budget for at least the next six months.
Include ALL planned transactions in the budget.
Review and Control
Update the plan at the end of every month, looking at all monthly sales and purchases.
Identify variation from the budget and why it occurred.
Decide if any action is needed, and take action as soon as possible e.g. change the timing of sales or purchases, or discuss terms with creditors, debtors and/or the bank manager if required.