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Compiling cashflow records for each programme farm was one of the first steps that Dairylink Ireland adviser Conail Keown took when the new participants joined the second phase of the programme.
This involved pulling together records of all receipts (income) and costs over the past 12 months to see when and where money came into and went out of each farm business.
It allowed Conail and each programme farmer to see the true financial performance of the business in cash terms and was a starting point for making plans to develop each Dairylink farm.
Having cashflow records laid out for each receipt and cost for each month over the past year gives a basis for developing a projected cashflow budget for the following 12 months.
This is an appropriate time of the year for Dairylink farms to develop cashflow budgets, as the cost of production is increasing on a weekly basis.
Cashflow budgets were more common when milk price was on the floor in 2015/16. However, budgeting cash is a useful exercise regardless of milk price.
For Dairylink Ireland participants, plans are in place for investments in the near future, such as developing grazing infrastructure, land improvements and buying in new stock.
These investments all have the aim of reducing production costs in the long term, but will initially require cash to fund them.
Cashflow budgets for each Dairylink farm will give an understanding of when investments can take place and if they need to be funded from cash reserves, an overdraft or a short-term loan. Budgets also allow farmers to see if there is potential to restructure their costs to match cash inflow.
Milk price
These budgets are not without their limitations and require monitoring and updating throughout the 12-month period. The biggest issue with cashflow budgets is usually projecting milk price for the year ahead.
Some programme farmers have a proportion of their milk in a fixed price scheme which should allow milk sales projections to be more accurate. Monthly income from milk sales in a cashflow budget should be based on projected calving profile.
A sensitivity analysis should also be carried out to show how changes in milk price will affect farm finances. For example, in a 120-cow herd yielding 7,500 litres/cow, every 1p/l change in average annual milk price is worth £9,000 to the business.
This exercise can be useful for costs too and can show how changes in input costs (from both within and outside the farmer’s control) affect the business.
If the example farm has a feed rate of 0.35kg/litre, every £10/t change in concentrate cost over a year equates to £3,150. Likewise, every 0.01kg/litre change in feed rate is worth £2,250 over a 12-month period.
The cashflow budget outlined in Table 1 is for a Dairylink farmer. A milk price of 26p/l has been used across all months in the budget, which is down from an average price of 28.9p/l over the previous 12 months.
The other big unknown in cashflow budgets is meal price. In this cashflow budget, a dairy nut price of £260/t is assumed for the 12-month period. Concentrate costs also take into account an anticipated lower feed rate than last year, as the farmer is aiming for a more targeted use of concentrates and better use of grass.
Projected budget
Compiling cashflow records for the previous 12 months first can be useful, so that the projected budget for the next 12 months can be mirrored on it, as some receipts and costs do not vary much from year to year.
In the interests of space on this page, most costs have been brought together under sundry costs in a single row. This includes costs relating to veterinary, AI, contractors, machinery, employed labour, loan repayments, straw, electricity, repairs, land lease and professional fees. Likewise, stock sales includes calves and cull cows, while concentrates includes dairy nuts and blend, calf meal and milk replacer.
The example does not include costs associated with capital investments which are being considered for next year and may be fully or partially funded from cash reserves.
The cashflow budget will be used by the farmer to plan for these investments.
Programme farmers are encouraged by Conail Keown to have cash reserves in the bank for the next downturn in milk prices, so funding investments from short-term loans may be a sensible option in some cases.
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