Stephen Cadogan: Why every dairy farmer needs a cash buffer in 2025

A recent Dairy Edge podcast has advised dairy farmers with cash surpluses to make sure they have a rainy-day fund, or cash reserve fund

Building a budget alongside the Cost Control Planner from Teagasc allows you to look at where you are currently, and look forward to see what’s likely to change.

Dairy farmers with cash surpluses should make sure they have a rainy-day fund, or cash reserve fund, advises Teagasc farm management specialist Kevin Connolly.

On a recent Dairy Edge podcast, he said: “It could be the case there will be bad years to come, or difficult years to come, and those cash surpluses would be most welcome in those years. Having that buffer of a fund, that you could call on, is a useful thing.

“In years that you have a cash surplus, if your rainy-day fund or your cash reserve fund is looking fairly low, it’s a good idea to recharge that. Put some money aside before you even consider spending any surpluses”.

“Dairy farming is in a pretty strong position in 2025, and it’s looking reasonably positive," said the farm management specialist. "From a cash flow perspective, there should be reasonable strength and scope there for farmers to look at investments”.

“Structuring debt, finance for investment, is critical as well, not trying to make repayments on loans over a short period of time, that’s going to put the business under pressure,” he said.

Kevin Connolly: 'I would be encouraging people that have significant debt already on the farm, if there is surplus cash there, that maybe a better use of that cash is paying down some of that debt, particularly if it’s at high interest rates.'

“If it’s a situation where you’re going out to fund an investment with debt, don’t maximise your credit capacity or plough your full loan capability into one investment, leaving you with no scope for even a small amount of additional debt. to fund even short-term spending, or if some emergency comes up on the farm. Make sure that you have a little credit reserve, a bit of unused borrowing capacity to be able to call on. That’s critical,” he said.

He cautioned against rushing in and spending in the wrong areas.

“I think it’s fair to say that tax, and even the availability of grants, sometimes drive a lot of investment decisions. There’s no doubt about it, the likes of a healthy grant or the ability to offset a tax liability can be a significant sweetener in helping farmers make an investment decision.

"You still need to look critically at the money you’re spending on that investment,” Mr Connolly said.

“You need to look at the investment on its own. Critically, is that going to contribute to the business, or what is it going to contribute to the business? Is it a sound investment?

“You need to think about how repayment on the balance of that investment is going to look in a number of years’ time, and whether that investment is still going to be contributing to the business? 

He added:

Any investment made really needs to fit into a long-term plan for the farm.

Mr Connolly recommended borrowing for high-cost capital investment, if rates and terms are acceptable, rather than using cash surpluses. “In a lot of cases, you are still going to put up a percentage of any investment in cash,” he said.

“There’s nothing wrong with short-term or small capital investment being financed out of cash flow, with the health warning that you have your cash reserve, your rainy-day fund, in place, and it’s kept as such, and not dipped into. 

"I would be encouraging people that have significant debt already on the farm, if there is surplus cash there, that maybe a better use of that cash is paying down some of that debt, particularly if it’s at high interest rates.”

Tools to monitor your income

He said there’s more information available now to farmers for managing finances, whether accessing online banking and having that information available at your fingertips, or using some of the reports available through your accountant.

“We have the likes of the Profit Monitor in Teagasc that allows you to look at your financial situation on a yearly basis, and benchmark it and work out your profitability and your cost of production.

"On an ongoing basis, monitoring cash flow, or putting a system in place to track your cash flow during the year, is a great thing,” he said. 

“We have our own system for that, the Cost Control Planner, which allows you to monitor cash in and cash out on a regular basis, and it really gives you a handle on how the business is operating financially. 

"It allows you to budget as well, which gives you a fair bit of confidence if you are going to do a bit of spending, or making any change in the farm business.

“Something like the Cost Control Planner gives you that bit more information than just looking at your bank account balance. It tells you where the money is coming from and where the money is being spent.

Building a budget alongside it allows you to look at where you are currently, and look forward to see what’s likely to change. "That gives you great information to be able to react in time and put plans in place,” he said.

“Investment decisions take a bit of time. It takes a bit of planning to put in place. It’s really not something you want to be doing on the spur of the moment, and you really need to be using good information to back that up and that’s where something like a cash flow plan is very useful,” he advised.

Stephen Cadogan

“The Business Planning tool that we use starts by taking a base year, your current year, usually using figures from the Profit Monitor, and starting off with the existing assets that you have on the farm, stock and facilities and the land you have available". 

The farmer’s plans can be built into the Business Planning tool, clearly costed, with the additional cost of running the farm factored in.

“Usually, a lot of these investments involve a bit of debt finance, and that obviously is a critical component to drop in to the plan, and to see the impacts of repayment of that debt, and whether the cash flow is going to be able to support that,” he said. 

“Stress test it as well, based on costs increasing or decreasing, or the likes of interest rates increasing, to see the impact of that on the plan,” he advised. 

“Over a five-year period, or a period of an investment, the actual cash needs of a household can change as well, and it’s important to factor that in. You could have kids going to college, or additional expenses coming through."