Cash is King
Bank balances are under pressure across the industry. Crop and milk prices have dropped sharply since last year, while input costs for all producers have not returned to levels enjoyed a pre Covid. As for farmers carrying sizeable debt on overdraft or unfixed loans, the ratcheting up of the Bank of England base rate is hurting.
Levers for manipulating cashflow
The levers available depend on the size of the problem. At the easy end of the scale, simply retiming a purchase or sale can plug the deficit. But if there is a big hole in the cashflow, structural changes to the business may be needed. The trick, of course, is knowing “what (cash) is coming”. Anyway, broadly your levers are:
- Introduce savings – if you have cash in a savings account paying very little interest, add them in.
- Shop around – get quotes for medicines, fuel, fertiliser and concentrates before buying.
- Pay just in time – Quite a few farmers pay bills early. If you do, simply defer payment to when due. But don’t exceed credit terms as supplier interest charges will normally be high.
- Sell outputs sooner – crop farmers that store crop have the option to sell a tonnage earlier if it is uncommitted. Livestock farmers can cash in youngstock and culls earlier, saving the cost of feed foregone by these animals too, though selling youngstock early obviously reduces income later.
- Defer non-essential input spending – farmers that use the good years to top up soil reserves, sort the farm road or replace a dodgy bit of march fence, can cut spending in tough years.
- Bid less – finishers with a tight bank situation should reassess what they can offer. Clearly, not good news for farmers selling crops and stock but charity starts at home. Spring grazing and longer-term rental and contract farming agreements also warrant prudent budgeting.
- Reassess capex – Monthly payments to finance machinery, including farm vehicles, are a deadweight in many farm cashflows. There are often better ways to save tax.
- Asset sales – if sale of surplus assets doesn’t undermine farm productivity, this option can slash the financing of hardcore debt. But consult your accountant to avoid a surprise from the tax man.
Traps to avoid
- Chasing production – if your marginal litres of milk are returning less than their marginal cost, trimming production is the smarter move.
- Slashing use of key inputs – cutting inputs that cause a disproportionate drop in yield, growth rates or quality generally outweighs any short term cashflow benefits.
- Rescheduling debt – can be part of the solution but is often not the panacea, as moving debt from an overdraft to a loan typically commits you to regular repayment of capital.
The value of budgeting and talking
A cash(flow) budget just deals with estimating what cash is coming into and out of the bank in the coming months. No need for valuations, splitting capital from trading items, listing debtors, creditors, etc. Recent bank statements provide a starting point.
Making Tax Digital means many farmers now have a lot of income and expenditure detail, thanks to using software like Xero. Bespoke budgeting tools like Figured can be bolted onto such packages. A cheaper option is to download the free cashflow budgeting tool from the SRDP website (it includes a helpful example). By putting your numbers into the computer, you can think through and test the impact of using the levers listed above, before acting.
If you think that current cashflow difficulties require a deeper look at your finances, specialist grant funding is available to explore the options. Application details are on the FAS website.
Finally, don’t go into your shell. Avoiding your bank manager and suppliers solves nothing. Keep communicating with business partners, family, and friends. RSABI are also there to help.
Kev Bevan, 07368 825877
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