Managing Farm Cashflow during the Covid 19 Pandemic
April 20, 2020
Martin Reel, Acting Senior Business Technologist, CAFRE
Farm businesses in Northern Ireland are facing many challenges at present that are outside of their control. The health and wellbeing of family members is most important and following the guidelines outlined on the Public Health Agency website is paramount. Market disruptions are leading to lower prices for meat and dairy products, concentrate feed prices are increasing and livestock mart trade is interrupted. Cashflow projections should be undertaken to assess if shortfalls in income over the coming months will require action to be taken to restructure loans or seek additional overdraft facilities.
It makes sense to review all expenditure to ensure it is both absolutely necessary and good value for money. A good starting point is to look at your farm bank statements. Take a fresh look at each direct debit. Are you paying for a service you don’t use? If the answer is yes, then consider cancelling, but check first in case there is a notice period required and/or cancellation fee. If you do make use of the service make sure it is a net benefit to your business by either adding value or saving you more than it costs.
If you’re not the book-keeper in the family, take some time to review invoices to keep up to date with current input costs. Are you getting value for money? Have you priced around? Could you reduce quantities purchased? By looking at the costs it may highlight the areas to focus on in your business? Energy costs are falling , is it time to compare providers? On dairy farms, for example, CAFRE benchmarking figures show that concentrate per cow represents approximately 40% of the total cost of milk production. A focus on improved feeding efficiency will reduce costs more than focusing on any other input.
When margins are low, or farmers are under financial pressure, completing a cashflow budget is a well worth exercise.
What is cash flow
Cash flow is simply the movement of money into and out of your business. It is possible to get a good idea of the farm cash flow by looking at the monthly bank balance. However, any dealings that were cash only must be included, as these are not shown in the bank statement. Cash is essential for farms to meet monthly running costs. It allows you to pay the bills, (including tax), cover the cost of repairs and make essential improvements. In the long term, a business with more money going out than coming in cannot keep going.
Doing a cash flow budget
A cash flow budget can be simple to do. It is a forecast of the money that is expected to be received and spent over a certain period of time; usually the next 12 months. It helps you build a time line and plan for the future. It should include realistic estimates of level of production, prices and timescales. Cash is needed throughout the year but is not spread across the months evenly as there are certain times in the year when large expenses such as conacre or the contractor bill must be paid.
In the same way, some farm enterprises bring in sales receipts at different stages throughout the year. The budget shows the difference between money coming in and money going out each month, and the knock-on effect on subsequent months. It highlights times in the year when borrowing money may be necessary to keep the business going until sufficient income is generated. It also shows when peak borrowing will occur. This allows you to know your maximum requirement for a bank facility. A bank overdraft is ideal for short term, flexible borrowing such as this, but not for longer term borrowing.
Discuss your options
Since the cash flow budget is a prediction of how the year will “pan out”, it needs to be regularly monitored and updated. This allows you to take account of such things as changes in input prices, a delay in sales of stock or changing sale prices. If it looks like there will be a shortfall, it is vital that you discuss your options and don’t ignore the problem. If additional borrowing is required, approach your bank sooner rather than later. Another alternative is the UK government’s coronavirus business interruption loan scheme (CBILS). Under the scheme, which offers loans to small businesses (including farmers) on repayment terms of up to six years, government will pay interest and fees for the first 12 months. Other UK government schemes to help businesses are the Self Employment Income Support Scheme and the Bounce Back Scheme.
A cash flow budget gives the bank confidence in you and your business and is often required before they consider lending you money. It also helps you choose the most appropriate source of finance and so maintain a positive cash flow. A cash flow helps give control.
Use the right tools
Cash flow budgets can be done using pen and paper, but using a computer makes it a lot easier. A spreadsheet may be all that is needed to draw up a simple but effective cash flow budget to provide you with the confidence to manage your finances or discuss the options with your bank manager or accountant. CAFRE have a template available here.
There is also a short video below which outlines the benefits and practicalities of preparing a cashflow.