With so much volatility, how can you budget?” one farmer asked me recently. The need to budget and keep close control of your cashflow becomes more critical with volatility.

It is one tool that farmers have to ensure they don’t run into trouble. That is why Business Sense is focused on the cashflow challenge this year.

We are following six farmers who have committed to draw up a budget and fill out the money in and out of their account each month.

One farmer realised that the key benefit of cashflow planning is not just comparing what was spent with what you budgeted for the month. He is starting to use it to look forward to see what is going to come in and go out of his account in the months ahead.

How much money will you need in your bank account at the start of the month to get you through?

You have a good handle on what is coming in and have more control than you think of what goes out.

The farmers found that February, like January, was an easy month to fill out, as there were few bills paid.

On the dairy farms, milk cheques for January were small (some as low as zero) and the first few calves sold brought some money in.

It was the two beef farmers who had the biggest sales, as they both sold cattle. One of these farmers only sold the 19 bullocks on the last day of February, so the money did not appear in the account and will feed into next month when he will pay back his stocking loan.

One farmer involved in a purchasing group paid out more than expected for fertiliser. It was to get the best price for a full load before delivery. The prompt payment alone saved him €5/t or €100, while ordering a full load and being in the group saved him another €250.

It shows that deals can be done if you have the cash buffer in your account.

Most of the farmers are working on merchant credit. The tillage farmer in particular is heavily dependent on it at this stage.

He has started to use a number of merchants to try to get a better price. However, the danger here is that bills will mount up further with the bad grain price. He has some big decisions to make, te first of which is whether to sow spring barley at all.

David

David milked 55 cows on 86 acres in 2015, but plans to increase to 70 cows in 2016. A progressive farmer, he has focused on many of the right things – maximising grass in the diet and compact calving.

It is for these reasons that his finances are strong, with little borrowings and a buffer in the bank at the start of the year that will protect him from the low predicted prices in 2016.

However, he is planning to build extra accommodation in 2016, so he has to plan carefully to ensure he does not fall into the building trap.

Filling out the monthly cashflow accounts took 20 minutes at the end of February. “I start by printing off the bank statements,” said David.

David budgeted for no money to come into his account in February. “I sold 17 calves earlier than I thought and that brought in €1,230 or €72 each. Two cull cows also went, bringing in another €750,” he said.

However, a lot more money went out of David’s account in February than the €11,100 budgeted. At €20,800, it was nearly twice as much.

On the surface, it looks like a cause for concern. We talked through each item.

On costs, the biggest jump was in fertiliser, which was €8,900 compared with the €6,000 budgeted.

“Fertiliser was cheaper than I had budgeted, but to get a good deal I bought a full load and paid before delivery to get another €5/t off,” said David. This will see lower fertiliser bills come in for the months ahead.

Parlour costs were €300 more (€1,500 versus €1,300), as he took in a large order to ensure he did not run out during calving. The other major jump was €4,600 for land rental.

“I rang the farmer earlier than normal and paid him before calving started to have one more job out of the way,” David told me.

One payment that was missing was labour. He had budgeted in €700 in February. “It was less than this, but I paid the person the cheque and he must not have lodged it.” This is another point that catches people’s planning out – cheques that are written but not yet cashed.

In January, €2,500 was supposed to go out of the account to the pension, but it had not.

“You could easily have missed this if you were not budgeting and assume your current account is stronger than it really is. The company wrote to me looking for it and I sent them off a cheque in February and it came out,” he said.

Looking back at the first two months shows that €3,400 more came in than was budgeted, mainly due to the earlier stock sales. Farm expenses were €8,500 higher mainly due to paying a lease earlier and buying more fertiliser to get a better price.

Drawings were as expected at around €2,900, but an extra €1,000 than budgeted was put into pensions. The total actually going out in the first two months was €24,024. It was €7,414 more than the €16,610 budgeted to go out.

David started the year with a buffer in the current account that was able to absorb the increased outgoings. However, as David said, this buffer allowed him to get away with poor financial management in the past that he wants to improve.

“It was only when I filled out the February figures that I realised I have been using the cashflow planner wrong. I’m using it to only look backwards.

“What I should be doing is looking at the month ahead to identify how much money I need in my account for the months ahead,” he said.

This is a critical point in cashflow planning and budgeting. It is aimed at getting farmers to look forward to see the issues ahead.

This will be even more important for David, as he plans to buy 10 to 15 cows and possibly rent ground, as well as investing in building for the future in the months ahead.

Fred

Fred is rearing 120 calves to sell as stores. He also has 12 two-year-old heifers and 56 bullocks from last year. He finished the strongest 19 bullocks of these and sold them in the last few days of February. The cheque only came in early March, so does not show up this month.

Fred didn’t spend anything in January and only paid out €2,850 in February. That was €1,000 less than he budgeted. The money in got a boost of €5,500 of VAT repaid.

“This was VAT back on capital investments going over the last two years. It had been due for a few months, so it was a welcome surprise,” said Fred.

While very little has been paid, the merchant and stock bills are mounting. He has bought 59 calves at €136 each, or €8,000 in total. He has only paid for three at this stage. Adding up the total bills, there is over €46,000 outstanding to farmers and merchants.

The cattle cheque is for €24,280. “I intend to sell another 30 store bullocks for €950 each to bring in another €28,500 in total in March,” said Fred. It will allow him to pay off the €40,000 stocking loan and draw it back down again. Having the stocking loan money in the account will allow him to pay off all the bills that have accumulated. For Fred, managing his cashflow has become a juggling act that he hopes to get on top of.

James

James was a new entrant to dairying in 2015. The move put his cashflow budget under stress and left merchant bills that he plans to clear this year. He did the budget to milk 70 cows on 70 acres at home, with an additional 20 acres two miles away.

I visited him again and we input the figures together. When he called out the milk sold at 4,022 litres and the cheque of €1,822, the milk price of 45.26c/litre jumped out. It was only when James looked closely at the statement that he realised that a seasonality bonus had boosted the cheque.

“I haven’t spent much this month,” he told me. He was right, as only €882 had gone out of the account, €2,400 less than he had budgeted.

However, looking through the budgeted costs, it was obvious that the bills for feed and fertiliser already purchased would arrive in the following months. That is one of the benefits of cashflow budgeting – being able to see the costs that will come in.

Drawings were €500 lower than budgeted. “We were too busy to go anywhere,” joked James.

It meant that the actual money going out of the current account was nearly €3,000 less than was budgeted in February.

Looking back over the first two months, he had budgeted €5,209 to flow out. The actual figures showed only €2,012.

Again, it is not because he did not incur the costs, but that he has not paid them yet. It shows that farmers have more control over their cashflow than they think.

“I will have a good few calves to sell in March, as well as a few cull cows. With the milk cheque of €4,000 expected, at least there will be more than €8,000 coming in,” said James.

Lorcan

Lorcan’s overall farm goal is clear. He plans to expand to milk 180 cows on the 64ha farm in three or four years’ time.

He milked 100 cows in 2015 and has 144 cows to calve down next year, so he is well on his way.

He had a busy year in 2015, putting in a 20-unit milking parlour as part of the plan. However, Lorcan has fallen into the building trap by spending too much on buildings from cashflow.

He has been busy addressing that since we first met. He met with the bank and applied to increase and restructure the loan and get a cashflow budget done as part of his plan.

On the February budget, no money came in as budgeted and just over €14,000 went out. This was around €5,000 more than budgeted.

Most of this was higher vet and feed bills, which had to be paid on the day.

This stems from the problems with not borrowing enough for building in the first place. Lorcan has continued the discussions with the bank over increasing the term loan for work already done.

Eoin

Eoin has 25 suckler cows and 150 ewes on 100 acres. With his wife working and three children, he recently gave up a job to become a full-time farmer.

For Eoin, the target is clear. The farm must contribute €20,000 to the household each year. When he put in his February figures in the cashflow budget, it came in very close to what was budgeted.

The 12 heifers he sold made €1,110 each or €13,349. That was €749 more than he budgeted.

Farm expenses for February, budgeted at €2,775, came it as €2,487.

With loans and drawings also close to budget, it meant that the actual cash inflow less outflow through the farm account for the month was €9,134.

It was €780 more than the budgeted €8,255.

With January just as close to budget, it meant that over the first two months, the current account was up €5,453.

This was just €538 more than the €4,915 budgeted. It shows how close you can be.

With only two months, gone Eoin will not get complacent. He can’t afford to.

The March budget shows that €2,213 will flow out of the account, as more money goes out than comes in.

The current account will go into overdraft in April and it will be October before it goes back into the black.

Garret

Garret owns 106 acres and rents an additional 166 acres. Like many tillage farmers, he does a bit of contracting as well. With poor price prospects again this year, he is seriously looking at the direction of his business.

“I did three things in February to make sure my cashflow improved,” he told me. “The first was to actively chase down money I was owed for straw and contracting. It wasn’t easy, but I brought in €9,600 for contracting over €3,100 for straw.

“I need the money, as I had to pay off a stocking loan of €9,000. The other costs of the month came in at €968 less than budgeted. I did buy a laptop for the farm, so I will be able to keep better records,” said Garret.

The second major thing Garret did was to say no to land that came up. “I was offered 50 acres some distance away at €100/acre. I would have jumped at this in the past.”

Finally, he was offered a job for a few days a week and took it. “With less land, this option looked far better for the year ahead. I am afraid of not being able to pay my way come next harvest. The merchant bills are big enough and the risk too high to just sow and hope this spring.”

COMMENT

Many farmers don’t do cashflow plans because they either think they are too hard or there is no point. As the farmers are showing, it is easy to do each month and they are learning a lot about their business.

Cashflow planning is really about understanding what is going to come into your account and what will go out.

We have a large number of farmers who have signed up to the cashflow challenge. If you sign up, you will get an email twice a month. The first one will be at the end of the month reminding you to fill in the actual figures. The second will be early in the month, highlighting the challenges farmers are facing and solutions they are implementing.

If you don’t have a budget, you can still carry out the cashflow challenge by keeping details each month.

So if you want to set farming goals, make more money and improve your financial skills in 2016, why not sign up? Go to www.farmersjournal.ie/businesssense. You will be emailed the farmers’ actual cashflow plans and monthly tips on how to complete yours.