FOR farms, just like any business, success hinges not only on productivity but on one vital ingredient, cashflow.
Misjudging this flow, even briefly, can lead to financial stress that could easily derail your operations, and that’s why planning your cashflow isn’t just a good idea, it’s essential.
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Regular monitoring of cashflow is a key driver behind profitability on farms, and being up to date with your farm's financial position allows you to adapt and react to changes as they arise, whether it's a change in milk price or any other rising costs, or unexpected expenses, and deal with them before they become crises.
Start by building a budget that includes all expected income - grants, payments, sales - and compare that against your monthly outgoings, from loan repayments and tax to living costs. Reviewing past bank statements, invoices, and financial accounts is key to grounding your budget in reality, not just hopes.
Equally important is looking ahead. A good cashflow plan isn't just about covering next month, it should help set clear financial targets for the next five years. This means projecting future income, accounting for tax obligations, and ensuring you understand your break even point, minimum viable profit, what you need to meet your repayments, tax, and personal drawings.
In a bumper year, big profits can lead to steep tax bills. Spreading payments or setting aside a percentage of profits throughout the year can ease the burden. Consider whether income averaging still suits you, and if not, speak to your accountant about options like opting out for a year.
Finally, keep reviewing your plan monthly. This lets you spot problems early and adjust your strategy as needed. Treat it like a living document, one that evolves as your business grows and adapts.
Managing cashflow may seem daunting, but with the right approach, it becomes a powerful tool to grow your business confidently and sustainably.
Step 1: Start with known receipts (money paid in)
They will be your Basic Payment Scheme, GLAS payment and ABC payments etc. There could be some variation as to when they come in, but, in most cases, it is best to put down when they were received into your accounts last year (check bank accounts / payment statement dates)
Top tip: it is best to underestimate production figures and other income expectation and over-estimate the farm expenses.
Step 2: Project your income
Dairy farmers should estimate the volume of milk they will sell, and the price received.
Cattle farmers should draw up a selling plan for the year. This may change depending on prices, but it will allow you to make a start and review throughout the year.
You know the stock numbers, so you need to estimate what month you plan on selling animals and how much you are going to get.
Many farmers have other sources of income during the season and you should include this other farm income if it is likely to be there again for the forthcoming year eg sale of fodder, agri contracting, rental income etc.
Top tip: prepare three scenarios – best, actual, and stressed budget. Only put the absolute essentials in your stressed budget – this budget may not be sustainable for the long term, but it will help during times of tight cashflow.
Step 3: Work out your expenses (money paid out)
Use your last 2-3 years’ set of financial accounts to compare expenditure. When estimating your expenses, remember to allow for increased costs and adjust major costs like fertilizer or feed up or down.
Work through your costs systematically, examining each item of expenditure – it will take some time to complete, but it will be worth the effort to get it as accurate as possible.
You need to include the payment in the months that the money will actually go out of the current account, not the month when the job or purchase was actually happened. For example, silage may be cut in May, but when do you usually pay the contractor?
Top tip: What signals or information is available on the marketplace that may help you with your predictions? Look out for commentary from press and other media sources. Try and forecast your income as best you can in your budget and then review, as necessary.
Step 4: Use your bank statements as a guide
Use last year’s invoices/chequebook to guide you through the payments for the year, but consciously work out if it will be lower or higher this year.
Look through your old bank statements or use online banking apps to help you identify any direct debits or standing orders you have going straight out of your accounts. This could be ESB, leasing and HP repayments, credit card, accountancy payments etc.
Your old bank statement will identify loan repayments collected by financial institution.
Update these repayments if you have taken out any new loans or a loan has been repaid.
Note: A common mistake that people make is that they will not have any unexpected capital expenditure allowed for in their budget, for example a tractor, repairs etc. Allow for unexpected items that must be replaced or repaired if they break down.
Step 5: Include living expenses.
Estimate how much you will need to live and put this in as a monthly expense.
Some farmers have a separate bank account from which they pay a sum for living expenses in each month.
This helps them to budget as otherwise you may tend to underestimate what you are spending on the house.
A lot of farmers get a shock when they see the drawings figure in the account at their review meeting as they may not have realised how much money was being spent during the year if all the money is spent from the one farm account.
Step 6: Act on the picture.
With a full picture you now must act on what it spells out.
The first question you need to ask is if you are going to breach your overdraft, even if for a short time? You need to ring the Bank, to either extend an overdraft or arrange a credit line. A credit line will be a cheaper option than trying to rely on merchant credit. Remember the more effort you put in to identifying the issues, the more effort the bank will put in to finding a solution.
Cash Surplus: Ask yourself how you will use this surplus eg invest back in your farm, pay off debt or seek off-farm investment opportunities. These decisions should be made in line with your personal and business goals.
Cash Deficit: Time to ask yourself some hard questions: What is the major issue on the farm? Low production figures resulting in low income; farm working expenses too high; or the financial structure and funding of the business, not right? Do I need to make major or minor changes to make this budget work?
Step 7: Make it a habit.
Once you have set up your cash flow budget, you should look at it at the end of each month. Planning and monitoring allow you to be more pro-active and less reactive - to concentrate more on addressing the root of the problem.
It may be worthwhile to look back over your budgeting process; were your targets and forecasts for the year realistic? Were you conservative enough with your figures? Too conservative? When setting targets, base your figures on the last five years production or expenses, look at trends in your expenditure, talk to the experts and make sure the numbers look realistic.
For more information contact IFAC on 023 884 1785 or visit www.ifac.ie
