Seven steps to getting a grip on farm finances after a difficult spring

Ignoring financial problem won’t make them go away and will just mean that financial stress becomes pervasive.

As the weather gradually improves, it's clear the damage from this past winter isn’t solely confined to the fields. 

The combination of additional feed purchases and reduced output either in the form of milk supply for dairy farmers or liveweight gain for cattle and sheep farmers is causing a double whammy when it comes to the impact on cashflow and the bills run up via merchant credit. More importantly, it will have a knock-on effect for the remainder of the year. 

There will be some uplift in milk production as cows get better nutrition at grass and cattle will turn inside out when they get to ruminate on full bellies and there is generally leeway with creditors in meeting repayments. Whilst the fine weather will mean farmers' focus will quickly change to field work it should be high on the priority list to give some attention to where the farm is at financially which can be broken down into seven steps.

Step 1: Make a list of what purchases are likely to be needed over the coming months, this should be as detailed as possible to include feed, fertiliser, contracting charges, insurance, fuel, electricity, veterinary products and other sundry farm inputs, and if possible breakout the payments per month. Separate those purchases which are on credit (eg via co-op or merchant credit) and those that must be paid directly from the bank at the point of purchase.

Step 2: Take your opening creditor balances, add the amount of purchases you expect to make per month as per Step 1 and make an estimate of the number of payments you’ll need to make to creditors per month to stick within your agreed terms or their expectations.

Step 3: Make a list of any other outgoings that need to be met to include personal drawings, mortgage, loan and hire purchase or lease repayments, Revenue and health insurance and life assurance payments, motor tax and insurance.

Step 4: Make a best estimate of the income that’s likely to be received over the coming months.

Step 5: Take your current bank balance and add and subtract the income and outgoings per month including the payments directly for purchases not on credit and payments towards creditors. This is known in financial circles as a cashflow projection. Where there is a deficit at the end of any or indeed every month, this indicates that there aren’t sufficient resources to meet outgoings as they fall due.

Step 6: Cashflow shortfalls identified in step 5 which are likely to clean out the bank account takes a variety of approaches. If there is sufficient overdraft facilities available then a farmer can choose to rely on those facilities until cashflow improves. It's important to clear your overdraft for pre-defined periods of the year (usually three consecutive days) in order to avoid surcharge interest applying. If insufficient or no overdraft facilities are in place then consider obtaining a credit line facility or stocking loan or term loan from your bank or financial institution to tie you over under cashflow improves. A further option is to approach creditors and give them the heads up that your intentions to pay are not aligned with your abilities to pay and that you would like to agree with them in advance for reduced payments for a number of months until your cashflow position allows for resumption of normal terms.

Step 7: Where farm finances look like there will be cashflow pressures for an extended period of time and if credit facilities are not available either because of insufficient repayment capacity or existing borrowings, and delayed payments to creditors will cause difficulties then a serious assessment of alternative options needs to be considered. Less aggressive options include switching and sopping around, delaying discretionary expenditure and seeking payment breaks on loans, however, if this doesn’t cut it then harder choices come to the fore, this could include the offloading of machinery rarely used, a reduction in stock, the leasing out of surplus land, the early drawdown of a private pension, the forward selling of crops or straw. Finding oneself in the latter circumstances is daunting as continuing to farm as ‘normal‘ won’t cut it as financially one cannot extract oneself from the hole. 

Ignoring the problem won’t make it go away and will just mean that financial stress becomes pervasive. If you need help speak to your accountant or other trusted advisor to help navigate any difficulties.