Top tips for developing and using a cash flow budget

Understanding your farm’s cash flow can be the difference between your business surviving and thriving.

In this blog, I’ll explain why cash flow is important (to you and your bank) and how to develop a cash flow budget. I’ll also share a case study featuring one of my clients. Implementing a cash flow budget helped them understand why their profitable business struggled with cash flow and helped them turn it around.

Cash flow defined

Cash flow is the cash that moves in and out of your agribusiness or farm. Positive farm cash flow is where you have more money coming in than going out, and it’s influenced by 4 key factors:

• The efficiency of your assets
• Your financial leverage
• How much profit you keep
• Your profitability

Your farm cash flow is important because it’s a key measure that shows your ability to manage debt.

Managing cash flow is challenging for many businesses. But poor harvests, changing commodity prices and demand make it harder in agribusiness. Despite this, it’s a super important financial measure and one that you should take the time to get right.

Why cash flow is important

If you’ve had the best harvest in years, cash flow mightn’t be something you’re thinking about. Especially if your invoices are being paid on time.

But if your cash flow is positive, it’s a good time to set yourself up for the future. Developing a cash flow budget is a great place to start.

Understanding your farm cash flow is important for the day to day running of your business. It’s also something your bank will want to know. With interest rates increasing, you might look for a new deal. Being able to show the bank that your cash flow is positive, could be the difference between an OK deal and a great one.

How to manage your cash flow

To manage cash flow, consider how much you’re paying for the essential costs to run your farm.

• Labour
• Living expenses
• Inputs

Which costs are fixed and which are flexible?

Cash flow issues can be short term (like a poor harvest or unforeseen expenditure). But they can also be a sign that there are bigger problems.

Sometimes, slow paying debtors can cause cash flow problems. Often, they are offering higher prices and this is where you need to weigh up the benefit of cash flow vs waiting longer to be paid.

Improving your cash flow

Improving your cash flow isn’t just about generating more income. There are several areas of your budget you could consider.

• Take a deep dive into your expenses

 When was the last time you worked through your expenses line by line? Are you getting the best deal on all your inputs?

Helping you to identify where you’re paying more than your competitors is one thing I can help with.

You should also set some benchmarks and aim to reduce your costs.

• Review the efficiency of your equipment

Are you using your assets well? Do you have unused equipment you could sell?

While buying new equipment after a bumper harvest might seem like a good idea, do you really need it?

• Get your debt structure sorted

We all know interest rates are increasing. Are you getting the best rates? Could you look at paying down some of the debt?

• Control farm expenses

Do you know where your profits are going? Are you paying for expenses on the farm or for the family? Paying for things like fuel, mobile bills and other expenses are a nice perk for your family or employees. But you need to know how much it’s costing your business.

Developing a cash flow budget

A cash flow budget measures the money (or cash) that comes into your business against what goes out and when. Think of it as the bucket of money you have available to pay all the expenses that keep your farm running.

To get the most from your cash flow budget, estimate how much cash is coming into the business in a month. Then you need to record actual cash and expenses against the estimated figures.

Estimating monthly cash flow for an agribusiness can be tricky. You need to go through every source of revenue and all your outgoings. Previous financial reporting can help. I can also provide a template to ensure we’ve included everything.

For many farm businesses, cash flow will be up and down given the seasonal nature of production.

Once you’ve estimated cash flow, the next challenge is monitoring cash flow throughout the season. You need to record actual expenditure. If you’ve used less water or fertiliser, expenses might be lower than expected. But if it’s after a bigger than expected harvest, revenue might be bigger than expected.

Tracking cash flow

Tracking your farm cash flow is also important if you have an overdraft or want to borrow more from the bank.

 In the case study below, I’ll show how developing a cash flow budget helped my clients understand why their profitable business struggled with cash flow and how they turned that around.

Client story

Net profits and positive cash flow often go hand in hand, but not always.

Based on their tax return, my client’s business was profitable. Their business income was greater than their business expenses. Making a profit is important when borrowing money, as it helps convince lenders and investors of the long-term viability of the business. 

But there are things that don’t appear on the profit statement that can affect cash flow. This includes drawings and loan amortisation.

Many farming businesses draw straight from their business without separating personal drawings. With the large numbers that farming businesses deal with, it’s difficult to keep track of what is being spent.

After harvest, they needed more money to cover input costs for the following year. Their budgets always showed a positive return, but still they were struggling with cash flow.

When faced with this situation, there are two things I suggest and almost always it results in a positive outcome.

The first is to monitor budget to actuals. As with interest rates, I have a spreadsheet my clients can use to record their budget and actuals. It automatically calculates variances and is a great way to track leaks in the business.

The other is to separate drawings from business spending. Set up a separate bank account and transfer a set amount each week or month (depending on your budget) to help you keep track of your drawings.

My clients did both and haven’t looked back. They know exactly where their money goes. Their cash flow is positive, they can pay their bills on time and they’ve even paid down some debt.

Conclusion

If you haven’t analysed your cash flow budget against your actuals before, it might look overwhelming.

But once it’s set up, you’ll see what a valuable tool it can be. Monitoring your cash flow regularly will help you measure the financial health of your business and improve your efficiency and farming practices.

Over to you

When was the last time you reviewed your farm cash flow?

Do you analyse your cash flow budget against your actuals?

If you liked this article, we’d love you to share it. And if you’ve got any comments or questions, please get in touch.