Every farming enterprise in each region of Australia experiences a unique pattern of annual cash flow. The severity of peaks and troughs between seasons is primarily dependent on the weather and level of rainfall.
Dryland croppers in Western Australia experience their highest cash flow influx immediately following Harvest in January and February.
Comparatively, livestock producers in New South Wales receive their highest levels of cash flow in immediately following wool or livestock sales and need to know if the cost of feeding stock over the summer is worth the premium they might get in months of low supply.
To graciously simplify these examples, the cash received is dependent on the quality of the product, which is determined by the temperature and level of rainfall.
So, despite these differences what separates the top-performing farm businesses from the majority?
Cash flow and Budgeting.
Cash flow issues can make or break your farm business. And it’s not just a lack of cash flow as you might assume; poor cash flow management, especially in the months when cash flow out exceeds cash flow in. Poor budgeting control can cause unnecessary stress and underperformance to an otherwise profitable farm business.
While many farmers are busy battling the day-to-day challenges of farming, budgeting can often take a back seat. This year, putting your head in the sand will be the worst thing you can do.
Livestock producers in the eastern states have been urged to start developing a feed and water budget now, to ensure they are able to get their animals through what is expected to be a long, dry summer-autumn in 2019-2020. These farmers need to validate their feed and water budgets against their financial budget. A production strategy is only successful if it matches a sound financial budget.
This year, climate forecasting models predict a very tight spring followed by a below-average summer rainfall. Paired with low stored soil moisture, pasture growth will be difficult, making this summer substantially dryer than recent years.
For summer croppers and livestock farmers, the trick to ensuring your success this summer is to get on top of your cash flow issues early and approach the heat with a best and worst case scenario budgets so you are equipped with knowing exactly what your cash flow will look like regardless of the weather.
Advantages of Cash Flow Budgeting
The humble budget is one of the most powerful tools you can have up your sleeve.
Here are some of the functions we recommend you take advantage of:
Review all expenditure and timings for payment
Decide when to sell and for how much, based on the following order:
Liquidity (how quickly do you need the funds)
Cash flow (what months can you afford not to have income?)
Review Income and expenditure forecasting
Review your current Enterprise(s) performance
Use your reports to develop insights into your business that may allow you to lower risk or increase profit and cash flow
Modeling scenarios for all possible weather outcomes or water availability
Avoid Budgeting Mistakes
So, you’ve crafted a 12-month budget for your expected cash flow over 2019-20.
But, be honest, is it any good? Don’t fall for the following:
Drawing it up, but not sticking to it. Or worse, never looking at it again - don’t rely on your memory to recall everything.
Underestimating costs and overestimating revenue. While it might make you feel warm on the inside, it won’t feel so good when your unrealistic forecasting falls through and you can’t pay the bills. Hope is not a strategy.
Being too rigid. You need a little room to move in case of any unforeseen situations that may arise. Also remember that expenses fluctuate regularly, so you must allow for that.
Only including the big items. The little things really add up and can take you by surprise if you haven’t included them somewhere. Look where you can cut costs, change suppliers or upgrade operations that are weighing you down.
Not revisiting and refining it regularly. This is a living document that changes as your farm business moves throughout the year. What may have worked last year may not suit now. Regularly compare your estimations with your actual cash book numbers to keep track of your progress and update the budget wherever necessary.
If you’re interested in strengthening your business’ future this summer, take our Financial Health Check survey below and find out how your budget compares.
Click here to take the survey.