Prepare cash flow forecast to avoid tight financial position

The bad weather is compounding the problems of falling milk prices and higher feed costs.

If you have a feeling that your financial position is going to get tighter, and you think you may be under pressure towards the end of the year, it might be worthwhile to prepare a cash flow forecast.

A cash-flow forecast is not rocket science and you don’t even need a computer. The important thing is that it is done right, in order that your cashflow forecast mirrors what your actual position will be.

The purpose of preparing a cash flow is to identify what your future bank balance is going to be, over a set period of time.

Having prepared your cash flow, it will help you determine if you will go into the red or even go over your overdraft limit, and it allows you to prepare a strategy to avoid running out of funds. The following are some basic steps which will help you prepare your cashflow from now until year end.

(1) Start out with your current bank balance, be it positive or negative.

You’ll get your current bank balance from your most recent bank statement, adjusted for any cheques you have wrote or lodgements you have made since the last transaction on the bank statement.

Don’t forget to include any direct debits and standing orders or loan repayments which would also have come off your balance since the last statement. (The beauty of online banking is that it allows you to see your balance without having to go through the above process.)

(2) Make a list of all current creditors — that is, a list of balances you owe to suppliers. Don’t forget to include creditors who haven’t even sent you a bill yet — such as contractors (or maybe land rental costs).

(3) Add to the list of creditor balances the purchases you think you’ll be making from now until the end of the year. This part of preparing the cashflow is difficult. It is surprising how many people don’t have a grasp of how much they expect to spend. Think of all farm inputs — including feed, veterinary, fertiliser, fencing, fuel, drainage, maintenance, dairy hygiene, electricity, repairs, etc.

If you are struggling at this point, you can always dig out last year’s invoices and cheque stubs to see how much you spend around this time last year.

Don’t forget to adjust for increases above last year’s costs — feed, fertiliser, fuel and contractors charges are all higher this year than last year. Include extra expenses which you may have this year, which you didn’t have last year.

The next process is to track how much of the current balance owed to creditors (adjusted for purchases until year end) which you expect to pay before year end.

(4) Prepare a list of personal spending you expect to take from your account.

Depending on your circumstances, your personal expenses over the next four months might include cash withdrawals for running the home and food costs; mortgage costs; amounts due to Revenue for last year’s tax bill, and preliminary tax for 2012; pension contributions in respect of 2011 to be made before Oct 31; and college or school fees; plus those costs which inevitably arise coming up to Christmas.

(5) On the income side — track how much income you expect to receive between now and year end, including cattle sales, cull cow sales, milk sales, crop and fodder sales, and the expected income from Department of Agriculture premia and schemes.

If in milk, you won’t receive your December milk cheque until January; don’t include it in your cash flow. Adjust your sales figures to take account of the drop in milk supply due to the bad weather and also the lower prices.

Also take account of any other income, such as a spouse’s wages, which are normally lodged to your bank account.

(6) Starting with your current bank balance, add each item of income and each payment going out, including direct debits, standing order and loan repayments, chronologically as you expect them to happen.

Include any bank interest and bank fees which you expect.

Update your expected bank balance following each transaction.

If at any point the bank balance goes below zero, or if you have an overdraft and the balance breaks through your overdraft limit, then your cash flow is alerting you to critical times where you are running out of funds or credit.

(7) It’s only when you have prepared the cash flow that you will be in a position to know if your bank balance will come under pressure. If this is the case, then you may be able to plan adjustments.

The strategies here can include:

nbringing sales forward — such as cattle sales.

nApplying for an increase in your overdraft limit.

nLooking for extended credit terms from suppliers.

nDelaying some expenditure which is non-critical, until your cashflow improves.

nDrawing on personal savings.

nOr entering instalment arrangements rather than paying entire balances.

In general, it’s not a good strategy to drag out payments to creditors if you haven’t got approval from your suppliers for a period of credit.

A cash flow forecast is a powerful tool to help identify any forthcoming hiccups in your bank finance.

Just like weather forecasting, it can be inaccurate — and a badly prepared cashflow will be of little use in identifying your bank finance needs.

It’s good to continuously go back to your cash flow to tweak and correct it as events unfold — this helps improve the accuracy of the forecast. It is always better to overestimate payments out and underestimate income, in order that you don’t leave yourself over stretched.

It is critically important that you include all income and expenses that you expect will run through the bank account — it’s also good practice to leave room for contingencies.

The above is for general information purposes and, as always, tailored advice is most appropriate for each particular person’s circumstances.

Your questions on this and other farming finance issues are welcome.


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