Finances need to be looked at too

With signs of spring just round the corner and demands of farm workload starting to mount up, it is all far too easy to get stuck into the field operations and take the eye of the ‘farm finances’ ball.

Keeping on top of the money end of the business is an essential part of running any operation, and farming is no exception.

One area which is critical to the farming cash flow cycle is the farm budget. In simple terms it is a list of all anticipated income and expenses for the year ahead, broken down into monthly payments.

You should also take into account items which do not affect the bottom line such as machinery purchases, bank loan payments and hire purchase payments as well as partners’ drawings. This will also give you the opportunity to decide if the business can support any future capital purchases.

The thought of preparing a farm budget can be a daunting prospect, with questions regularly asked surrounding their usefulness when crop prices are so hard to predict and timings of subsidies are still very much a mystery.

However, without undertaking this exercise there is no real way of knowing if you will stay on the right side of the overdraft limit.

A profitable business is not always a cash-rich business and the need for future bank assistance should be flagged up at the earliest opportunity. Your bank manager will not take kindly to a last-minute phone call.

Failure to keep up to date with issuing invoices can also be a drain on the cash reserves.

The majority of farm income is generated through self-billing invoices raised by merchants and markets. However, there will be several occasions throughout the farming calendar when work is undertaken where this invoicing process is not in place and to get paid you have to raise the invoice yourself.

It is all too common to put these tasks to the bottom of the pile when getting the boots on is a priority.

Handing the books and records into the accountant shortly after the annual year end has passed will also assist with any cash flow pressures on the horizon.

If the business has performed well, this will give you the earliest opportunity to budget for tax liabilities, taking into account any pension planning and profit extraction. If the business has gone through a poor period of trading, this should also flag up any changes to be made to the plans before it is too late.

An all-round review of your finances will also give you an indication as to where cash patterns lie and if there is a core overdraft level that you do not go below. Bank overdraft arrangement fees are paid annually and there is the potential to save future costs if the “hard core” element of an overdraft is allocated on to a term loan.

Although the Bank of England base rate increased back in November last year, and with the current rate at 0.5%, money is still relatively cheap to borrow within the agricultural sector.

Each business should be aware of its financial commitments, bearing in mind the existing interest rates in place. However, it may also be prudent to factor in the potential of a rate rise.

Like all businesses, farmers should take the opportunity to review current debt facilities with their bank, consider existing debt structures and any potential benefits of locking into fixed rate loans. This will also give some certainty for future budgeting purposes.

Planning your budget and reviewing your financial position is a vital part in all businesses.

Within the agricultural industry this is even more critical when it may take more than 12 months to generate cash from the initial outlay. A little time in the farm office will go a long way.