Managing cash flow for your farm business
A cash flow forecast will help you to understand when your business will go into deficit, or breach your overdraft limit, helping you to take action in advance.
Doing a cash flow forecast regularly and reviewing it will help you see when problems are likely to occur, identify any potential cash shortfalls and take appropriate action, such as:
- Talking to your bank or lender
- Talking to your suppliers
- Talking to advisers, such as your consultant and accountant
What is a cash flow forecast?
A cash flow forecast is the principal means of planning future finance needs. It shows future anticipated peaks and troughs in money coming into your farm business and the costs which the business will have to cover during that time.
Cash flow forecasts help to plan borrowing and indicate how much surplus money is likely to be available to the business at a given time. Before considering a loan, banks are likely to require a cash flow forecast, to demonstrate your planning.
Cash flow forecasts also identify the sources and amounts of cash coming into a business and the destinations and amounts of cash going out over a given period. To keep track of whether the predicted figures are being met, it is useful to have two columns, listing forecast and actual amounts. The cash flow is a good place for setting cost-reduction targets.
Webinar: Practical budgeting and cash flow forecasting
How to create a cash flow forecast
The forecast is usually done for a year, or two years, in advance and divided into months, or sometimes weeks, depending on how closely it is being managed.
The forecast lists:
- Inflows – receipts
- Outflows – payments
- Opening bank balance
- Cash movement (Inflows – Outflows)
- Closing bank balance
It is important to base initial forecasts of both receipts and payments on realistic predictions (e.g. a five-year average), particularly as the effect of an unrealistic figure can be cumulative over several months.
Cash flow is dynamic; it will change and need frequent adjustment.
A cash flow forecast should be part of a full farm business budget that includes a profit and loss account to look at levels of profit (or loss) your farm business is likely to achieve across the year so that you can decide whether this is sufficient for your needs. Understanding what you need from your business to survive through this period can be looked at through the process known as backwards budgeting, or profit target, as explained in our recent webinar: Strategic ways of reducing costs and outputs.
Managing inputs to manage your cash flow
To control costs and manage cash flow, spending time on the following is critical:
- Obtaining several quotes for inputs
- Searching for the best deals, particularly online
- Searching for low-cost credit terms
- Investigating joining a buying group
- Negotiating deals on regular orders
- Buying in bulk, where appropriate
- Managing machinery purchases by using finance, hire purchase or leasing to spread costs over time. Use our Machinery cost calculator and watch our webinar Machinery for Farming or Farming for Machinery?
Podcast: Maximising cash flow when the milk price is low
How to reduce variable costs and overheads
Variable costs can be reduced through carefully planning inputs such as:
- Appreciating the full nutrient value of slurry and farmyard manure and using them to help reduce dependence on artificial fertilisers – Nutrient Management Guide (RB209) Section 2 Organic materials
- Completing a feed and forage budget to ensure you are only growing and harvesting what you need – feed and forage budget calculator and webinar: Taking stock – forecasting feed budgets and milk volumes
- Careful feed purchasing – Back to basics on risk management – Buying in
Controlling overheads may be trickier, but it is important in the short term to look for good deals from energy, fuel and insurance providers and also to implement cost-saving measures for electricity and water. Controlling overheads is key to enhancing profitability and comparing your costs against others will help you see if there are areas you could improve in.