How much financing will your farm business need next year? When do you need the money and have you planned where it will come from? If you can answer these questions with a good degree of certainty, you are well positioned to deal with whatever opportunities and challenges 2014 presents for your farm business.
Volatile input and output prices, variable yields and the prevailing weather conditions can all have a major effect on farm cashflow from year to year and even within one year. We only have to look at the past 18 months to see by just how much cashflow can fluctuate. However, a lot of the guesswork and uncertainty can be removed by some simple advance planning of farm cashflow.
Managing farm cashflow
A simple cashflow management plan is an essential tool which clearly sets out the cash impact of trading activity, purchase of inputs and financing of assets as reflected in interest and/or capital repayments. It is a necessary tool to accurately inform the level of working capital support that the farm will require and when it is required.
It also highlights when surplus cash funds are available in the business. It is one of the more important tools for decision-making on the farm. Starting the year with a monthly cashflow plan will inform the level of working capital support you require for periods of cash deficit.
Regular review and updating of the plan as the year unfolds will enable you to spot problems as they arise and to make adjustments or take the appropriate action.
Funding working capital
All businesses use a mix of measures to fund their working capital cycle which often includes bank funding.
When applying for an annual working capital facility, an up-to-date cashflow management plan in support of a lending application will clearly illustrate the working capital funding required for the period ahead. This enables the bank to make an informed lending decision on the level of support the farm requires and gives the farmer the peace of mind that the right level of funding is in place.
Looking back, many farmers experienced cashflow difficulties in 2009. For some, these difficulties were compounded by on-farm investment which had been undertaken from cashflow in the previous years. When farm investment is carried out from cashflow, it may compromise the ability of the farm to withstand a period of low margin if the farm has used up its savings buffer.
Should you find yourself experiencing cashflow difficulties, for any reason, seek the necessary support at an early stage. If additional working capital is being sought from the bank, the initial cashflow plan coupled with an actual or revised plan will support the request and discussion. Having a cashflow plan in place should allow you to spot problems as they begin to arise. Our advice is to talk to your bank as soon as you see a problem emerging to allow time to agree an approach before the problem escalates.
Approaching a bank
Repayment capacity is the most important consideration for a bank when assessing a credit application. When approaching a bank for finance, it is important that you can demonstrate to the bank that your farm business will generate sufficient funds to repay capital and interest over the duration of the loan.
It is important to distinguish between farm profit and available cash as farm profit may have to be funnelled towards living expenses, paying tax liabilities or existing financial commitments before available cashflow is established. A cashflow forecast, based on realistic business performance projections is a key part of a strong business plan.
Planning for unexpected periods of income pressure and reduced cashflow is also a key component of any financial plan. Investment plans should be stress tested for periods of reduced commodity prices. Farmers who undertake significant investment tend to be more exposed to income volatility as the farm may have used up its savings buffer, have higher bank repayments, may require a ‘bedding in period’ for the investment and the farmer may be covering some of the costs from cashflow. If seeking bank finance for an investment ensure to structure the loan over the appropriate period, relative to the life of the asset, so as not to put undue pressure on farm cashflow by trying to repay a loan in an unrealistic or pressurised timeframe.
During periods of development, it is important to ensure that you have sufficient working capital in place, as the requirements of the farm will change. If we take the example of a dairy farmer expanding the dairy herd from within during the expansion phase, there is a substantial demand on cash from the replacement heifer enterprise.
While on paper, the farm is increasingly profitable, these heifers do not generate any cash until they start producing milk. This can cause a substantial cashflow problem on farms and is usually significantly underestimated by farmers. Spending time planning the cashflow of the farm is therefore critically important as part of expansion planning.
Farm financial management, including cashflow planning, is as important as any other aspect of the day-to-day running of the farm. Cashflow planning is a relatively simple exercise that enables you to look forward to assess any future cash and funding requirements and any potential cashflow difficulties. The exercise forces you to think through your farming plans for the year. It also tests your plans and should indicate if you will generate enough income to meet all your cash needs.
At a time when uncertainty and price volatility are much greater than in the past, cashflow planning is an important tool in influencing decisions on the farm and essentially managing risk. My advice to farmers is to take the time to complete a farm cashflow plan for the year ahead and to use this information to better manage cashflow for the coming year.
*Donal Whelton is the AIB agri adviser for the south west region covering Cork and Kerry. Donal is a native of Barryroe in West Cork and comes from a dairy farming background. He has a BAgrSc degree from University College Dublin and is currently participating in the Farm Entrepreneurship & Leadership Programme at the DCU Ryan Academy.
A simple cashflow management plan is an essential tool.It accurately informs the level of working capital support that the farm will require.It will enable you to spot problems as they arise and to make adjustments. Repayment capacity is the most important consideration for a bank when assessing a credit application.Take the time to complete a farm cashflow plan for the year ahead. Use this information to better manage cashflow for the coming year.
How much financing will your farm business need next year? When do you need the money and have you planned where it will come from? If you can answer these questions with a good degree of certainty, you are well positioned to deal with whatever opportunities and challenges 2014 presents for your farm business.
Volatile input and output prices, variable yields and the prevailing weather conditions can all have a major effect on farm cashflow from year to year and even within one year. We only have to look at the past 18 months to see by just how much cashflow can fluctuate. However, a lot of the guesswork and uncertainty can be removed by some simple advance planning of farm cashflow.
Managing farm cashflow
A simple cashflow management plan is an essential tool which clearly sets out the cash impact of trading activity, purchase of inputs and financing of assets as reflected in interest and/or capital repayments. It is a necessary tool to accurately inform the level of working capital support that the farm will require and when it is required.
It also highlights when surplus cash funds are available in the business. It is one of the more important tools for decision-making on the farm. Starting the year with a monthly cashflow plan will inform the level of working capital support you require for periods of cash deficit.
Regular review and updating of the plan as the year unfolds will enable you to spot problems as they arise and to make adjustments or take the appropriate action.
Funding working capital
All businesses use a mix of measures to fund their working capital cycle which often includes bank funding.
When applying for an annual working capital facility, an up-to-date cashflow management plan in support of a lending application will clearly illustrate the working capital funding required for the period ahead. This enables the bank to make an informed lending decision on the level of support the farm requires and gives the farmer the peace of mind that the right level of funding is in place.
Looking back, many farmers experienced cashflow difficulties in 2009. For some, these difficulties were compounded by on-farm investment which had been undertaken from cashflow in the previous years. When farm investment is carried out from cashflow, it may compromise the ability of the farm to withstand a period of low margin if the farm has used up its savings buffer.
Should you find yourself experiencing cashflow difficulties, for any reason, seek the necessary support at an early stage. If additional working capital is being sought from the bank, the initial cashflow plan coupled with an actual or revised plan will support the request and discussion. Having a cashflow plan in place should allow you to spot problems as they begin to arise. Our advice is to talk to your bank as soon as you see a problem emerging to allow time to agree an approach before the problem escalates.
Approaching a bank
Repayment capacity is the most important consideration for a bank when assessing a credit application. When approaching a bank for finance, it is important that you can demonstrate to the bank that your farm business will generate sufficient funds to repay capital and interest over the duration of the loan.
It is important to distinguish between farm profit and available cash as farm profit may have to be funnelled towards living expenses, paying tax liabilities or existing financial commitments before available cashflow is established. A cashflow forecast, based on realistic business performance projections is a key part of a strong business plan.
Planning for unexpected periods of income pressure and reduced cashflow is also a key component of any financial plan. Investment plans should be stress tested for periods of reduced commodity prices. Farmers who undertake significant investment tend to be more exposed to income volatility as the farm may have used up its savings buffer, have higher bank repayments, may require a ‘bedding in period’ for the investment and the farmer may be covering some of the costs from cashflow. If seeking bank finance for an investment ensure to structure the loan over the appropriate period, relative to the life of the asset, so as not to put undue pressure on farm cashflow by trying to repay a loan in an unrealistic or pressurised timeframe.
During periods of development, it is important to ensure that you have sufficient working capital in place, as the requirements of the farm will change. If we take the example of a dairy farmer expanding the dairy herd from within during the expansion phase, there is a substantial demand on cash from the replacement heifer enterprise.
While on paper, the farm is increasingly profitable, these heifers do not generate any cash until they start producing milk. This can cause a substantial cashflow problem on farms and is usually significantly underestimated by farmers. Spending time planning the cashflow of the farm is therefore critically important as part of expansion planning.
Farm financial management, including cashflow planning, is as important as any other aspect of the day-to-day running of the farm. Cashflow planning is a relatively simple exercise that enables you to look forward to assess any future cash and funding requirements and any potential cashflow difficulties. The exercise forces you to think through your farming plans for the year. It also tests your plans and should indicate if you will generate enough income to meet all your cash needs.
At a time when uncertainty and price volatility are much greater than in the past, cashflow planning is an important tool in influencing decisions on the farm and essentially managing risk. My advice to farmers is to take the time to complete a farm cashflow plan for the year ahead and to use this information to better manage cashflow for the coming year.
*Donal Whelton is the AIB agri adviser for the south west region covering Cork and Kerry. Donal is a native of Barryroe in West Cork and comes from a dairy farming background. He has a BAgrSc degree from University College Dublin and is currently participating in the Farm Entrepreneurship & Leadership Programme at the DCU Ryan Academy.
A simple cashflow management plan is an essential tool.It accurately informs the level of working capital support that the farm will require.It will enable you to spot problems as they arise and to make adjustments. Repayment capacity is the most important consideration for a bank when assessing a credit application.Take the time to complete a farm cashflow plan for the year ahead. Use this information to better manage cashflow for the coming year. 
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