5 ways for dairy farmers to balance the books in 2017
We've all heard the mantra that 'cash is king'; however, after two sad years for milk prices, that old adage could be changed to 'cash is scarce' when applied to dairy farmers.
While I have no doubt that dairy farmers will work their way out of the current cash-flow pressures, it does create stresses and strains on both the farm system and operator.
In the long-term allowing significant cash-flow pressures to develop is not a sustainable business strategy.
Unfortunately as milk prices recover, volatility won't disappear. So many factors influence supply and demand that achieving a sustained equilibrium that delivers consistent prices appears unlikely.
Therefore, it seems that we can't avoid these boom and bust milk price cycles. So as autumn heads into winter, it's now time to assess your financial position. This is both in terms of the costs of production achieved this year, bank balances (both assets and liabilities), stock numbers, and outstanding debts to merchants, co-ops, vets and the like.
Here are my top five actions for 2017
- Determine 2016 cost of production, and whether balances of current liabilities have increased or decreased since 2015
- Devise a financial budget for 2017 to assess potential cash surpluses
- Maintain and continue the discipline of a lowered cost of production in the 2017 season
- Bank a degree of cash by reducing merchant/co-op credit, overdraft balances, and pay preliminary tax up front. Consider saving a slush fund or achieve a bank balance target ahead of a seasonal deficit. These mechanisms will provide financial buffers for the future
- Spend sufficient time planning the total cost and opportunity to finance capital expenditure projects. Avoid spending capital out of cash-flow until the business has clearly recovered.
Subsequently, on the back of what was achieved in 2016, you should devise a 2017 budget with the aim of strengthening your financial position.
As the milk price shows signs of recovery, I ponder on what we should wish to achieve in 2017?
I also pose the question: what's more important in terms of financial performance - the milk price or the costs of production?