image expired

The season just finishing has been at best a challenge and at worst sole destroying. With ground unable to carry cattle forcing them to be housed early; poor quality and low yielding silage crops, and increased harvest costs compounded by low yields and poor quality.

So how can farm owners and managers ensure their business holds up to the heady demands of the next 12 months? Roddy McLean, Agriculture specialist at NatWest takes a closer look.

The tight global supply and demand forecast has raised cereal prices bringing some 'compensation' to arable farmers. The downside is that feed costs have risen for many livestock farmers and increased amounts of concentrates are likely to be required for longer to maintain animal performance. The result is that many businesses will consume cash at a faster rate or they may require more than they would normally over the coming months.

We all know that managers of successful farm businesses do not just pay attention to the detail of the technical aspects of farming the management of livestock and crops. They apply the same rigour, diligence and attention to detail in managing the financial side of their business.

Many will already have a 'picture' of how the next twelve months may look for their business – do you?  They will have prepared a cash flow forecast with assumptions noted. They are also likely to have taken this a stage further by forecasting the profit and loss account and balance sheet.  

Forecasting the cash requirement of the business is a good management tool as it:

• Forces you to think of your plans for the year, the inputs required and output achieved
• Tests whether there is enough income to meet the cash required 
• Predicts when and the level of borrowed funds required
• Predicts when surplus funds are available –  to which loan, HP payments etc could be timed to match, or highlight the potential to transfer monies to a deposit account 
• It provides a guide to monitor the actual cash flow 
• The major assumptions can be sensitised to see their impact to help the business  assess the level of risk to which they are exposed
• Helps in discussions with any  lender

If you don't consider how things are likely to pan out it will be difficult for a lender to have confidence in you and your business.

A comment frequently made about forecasting a business' financial performance is that it rarely matches the reality. However, how do you know where you're going and the progress being made if you haven't mapped out the route? By planning, you increase the chances of getting to where you want to get to. It is accepted that the actual performance will rarely be an exact match. You are dealing with biological processes which can and are variable including the climate. However, it is better to be roughly right than to leave it all to chance.

However, cash flow forecasts have their limitations:

• Cash flow does not equal profit
• By changing the phasing of when  income and expenditure is incurred a vastly different cash flow can be  forecast  
• They need to be backed up by and linked to physical assumptions

Reconciling cash flow to the profit and loss account and balance sheet, by taking account of opening and closing valuations, creditor and debtor positions and depreciation a more robust set of projections will be produced. This will provide the business with very robust and meaningful management information that can be monitored through out the year. Giving confirmation as to whether you are on the right track or that you may whish to look at taking a different path and reappraise your business make up and operation.

For some, it may appear a daunting task to sit down and produce a cashflow forecast and associated profit and loss account and balance sheet. There are number of computer programs or consultants who can assist in producing this information.  But it is vital to know how much cash your business requires to operate.

Tweet