Irish farmers are currently experiencing cash-flow difficulties due to low commodity prices, cost increases and a delay in grant payments. Coupled with this, the downturn in the wider economy has removed the financial cushion that supported many farmers. There are now fewer opportunities for off-farm employment and more modest returns from off-farm investments.
These changes have brought a sharp renewed focus on the need for farmers to improve their business management skills as well as to continue best practices in production husbandry. Irish farmers must include financial analysis as part of their daily routine: completed in the morning after milking – not in the evening or late at night, when concentration skills are poor. Tighter margins mean that knowledge and skills in financial management and effective monitoring are mandatory for all Irish farmers. The benefits of a cash flow budget are particularly evident when finances are tight, but farmers should prepare one in all circumstances.
A cash flow budget will answer questions such as: How much financing will your farm business require this year? When will money be needed, and from where will it come? A little advance planning can help you avoid short-term shortages of cash. One useful tool for planning the use of money in your farm business is a cash flow budget. A cash flow budget is an estimate of all cash receipts and all cash expenditures during a certain time period (usually a year). Estimates are made monthly and can include non-farm income and expenditures as well as farm items. Cash flow budgeting looks only at money movement, not at profitability. A cash flow budget is a useful management tool because it:
- Forces you to think through your production plans for the year.
- Tests your farming plans; will you produce enough income to meet all your cash needs?
- Projects when you must borrow money and when you can repay it.
- Helps you control your finances. By comparing your budget to actual cash flow, you can spot developing problems because of an unexpected drop in income or unplanned expenses, and spot opportunities to save or invest funds if net cash flow is higher than expected.
- Helps you communicate your farming plans and credit needs to your lender. Analysing a Cash Flow Budget Statement If your total projected net cash flow for the year is negative, there are a number of annual adjustments you can make.
- Sell more current assets (crops and livestock). Be careful here, though. Reducing inventories may solve the cash flow squeeze this year, but result in even more severe problems next year.
- Finance capital expenditure with credit, or postpone it until another year.
- Try to reduce the size of medium and long-term debt payments by lengthening the repayment period.
- Reduce non-farm expenditures, or increase non-farm income.
Even when your yearly net cash flow is positive, sizable deficits can occur in certain periods. This is due to the seasonal nature of expenses in farming and the tendency to sell large quantities of a product at once. Some types of enterprises, such as dairy, produce a more constant cash flow than other types. Seasonal adjustments that you can make when projected net cash flow is positive for the whole year but negative for some periods include:
- Shifting the timing of some sales.
- Shifting the timing of some expenditures.
- Increasing short-term borrowing in periods of negative cash flow with repayment projected in periods of positive cash flow.
- Delaying the due date of fixed debt payments to periods with positive net cash flows.
Review your cash flow budget every month – prices and costs may have been different from your estimates, or your production plans may have changed. Monthly bank statements are a good source of cash flow information against which you can compare your budget. This will help you anticipate changes in your needs for cash and credit later. By planning where you are going financially, you can increase your chances of arriving there safely.
Special Report by Dr. Ailish Byrne, Senior Agricultural Manager, Ulster Bank