Business Farming

Wednesday 1 October 2014

Managing cashflow is key over next six months as superlevy fines kick in

Mary Kinston

Published 04/12/2013 | 02:30

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"Turnover is vanity, profit is sanity and cash flow is reality," is a powerful saying that is most apt for this backend. It is especially true for farmers facing the challenge of managing their cashflow this winter and coming spring, where the superlevy fine is being withheld on over-quota milk.

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With such good autumn weather and over 40c/l being paid for high-solids milk, it made financial sense in many a mind to continue to supply milk over-quota.

However, the reality of money being held back, combined with wet weather and falling grass supplies at the beginning of November, has seen numerous herds dry off earlier than planned this November.

For over-quota herds, that will mean a limited income until the April milk cheque is received next May. For this reason, a cashflow budget is an essential tool to assess the farm's current cash position and predict where it will be next spring.

Obviously, the more effort you put into this exercise, the more you will get out. Determining monthly income and expenses will make you more informed as to when and by how much the cashflow will be under pressure.

There are numerous spreadsheets and accounting packages that can help you with this process. However, although all dairy farms are a business like any other, monthly cashflow budgets aren't readily found in every farm.

There are several reasons for this, but the unpredictable challenges that nature throws at farm expenses have under-standably made farmers sceptical about the value of this exercise. But when facing a situation where income will be limited, it's important to have some idea how large the deficit will be and what the restrictions on spending are.

This will make you consider all your options rather than arriving at a deficit which is so large that it impacts on the day-to-day running of the farm, and may require long term finance to resolve it.

For those who prefer pen and paper rather than computer, there are simple ways to complete this process. The first step is to identify the period of time that you need to cover. Many will complete an annual cashflow budget and consider the period January to December. Whilst this highlights the financial viability of the business, the total annual income can smooth over the cracks, and it will not highlight periods when expenses are substantially greater than income, and when there will be pressure on the bank balance.

Therefore, farmers with superlevy issues should consider a five or six-month period from now until May or June, as well as the annual cashflow budget. Doing a monthly cashflow budget is by far the best, however.

There are five simple steps to complete when doing a basic cashflow budget on paper:

1.Determine the total income for the period in question. You will need to calculate the income you will receive from milk, stock sales, single farm payment and any off-farm income. You can also consider any funds available to you in the form of your present bank balance, overdraft facilities, agreed loans and savings.

2.Determine your monthly commitments on your current account. It's always a good exercise to be aware of the total monthly amount in direct debits, standing orders and general living expenses.

Here, you consider the total monthly cost of servicing your mortgage, business loans, and hire purchase agreements as well as your life and health insurance, pension contributions, saving policies, and whether you are making any monthly tax contributions?

Also consider the direct debits associated with electricity, telephone, mobiles, broadband and television.

Remember, many payments are made every other month or quarterly, so divide these in to monthly payments where appropriate.

Finally, use your current account statements to estimate monthly transactions covering groceries, cash withdrawals, fuel etc. Having added all of these categories up to determine your monthly outgoings, you can then multiply them up to cover the period in question (eg multiply by six for a six-month cashflow account) to determine your current account expenses.

3.Subtract the current account expenses from the total income to calculate the total working capital that can be used to cover farm expenses and pay off debt that is owed.

4.Determine the present debts owed to merchants, co-ops, vets, contractors etc. Make notes of the amount to be paid, to whom and when, as strategic use of credit may be required here to manage a cashflow deficit. Remember merchant and co-op credit is often expensive.

5.Estimate farm expenses that will accrue over the period in question such as feed, fertiliser and vet bills. Again, this may help you determine when you will apply your available working capital to allow a smooth running of the farm.

Finally, when doing a cashflow budget, remember to give yourself a contingency fund because who knows what challenges the weather may present and exactly what it will cost in feed to get over the spring.

Dr Mary Kinston is a Kerry-based farm consultant. Email: mary.kinston@gmail.com

Irish Independent

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