Senior Partner Roger Wraight discusses the importance of cashflow management
Effective cashflow management can be the key difference between success and failure in any business. But with the volatile climate that farming is operating in currently, and its subsequent impact on profitability, a well-managed cashflow has become critically important.
With revenue under huge pressure, farms and rural businesses could fall into difficulty, particularly those with high borrowings, if they don’t manage their cashflow effectively. Understanding in advance where the pressure points could be, involves forward planning and removes the risk of last-minute and often expensive responses to a lack of funds.
Many farmers have historically been poor in this area, with too many businesses failing to produce a budget and ignoring cashflow all together. I still hear the old adage ‘you can’t plan in farming’ far too often. And frankly, for those who choose to continue with that outmoded view, could find the future more challenging.
All too often we come across businesses that have suffered a continued deterioration in cashflow over a number of years. Frequently they are not tracking their performance against budget hence have failed or been slow to identify and respond to that trend.
Good business planning is essential to the success of any farm or rural enterprise. It enables forward planning on funding, provides a benchmark against which you can judge performance and helps identify potential issues at the earliest opportunity. It’s a fundamental tool for any business and one we stress as the best starting point with every client.
A full business plan should identify gross margins, other incomes, fixed costs and capital items, linking them back to cashflows. Although it requires a serious time commitment during its development phase, the plan should deliver huge benefits once complete.
Done properly your business plan can help you secure in advance any necessary funding at the start of the year. Banks respond positively to a well thought through business plan. It helps build their confidence in you and makes them far more likely to continue to be supportive on an on-going basis, particularly during periods of lower returns.
The Keys to effective cashflow management are:
- Understand your budget – Stress test all assumptions on cost and revenue making sure you have considered the sensitivity of price shifts
- Make sure you have taken all borrowing costs and capital repayments into account – including loans, mortgage and Hire Purchase agreements.
- Do not forget private costs, taxation and other capital items.
- Procure funding in advance – Take your bank manager through your business plan at the start of the year. Show them you have a clear understanding of when you will need support on cashflow.
- Keep communications channels open – your bank will appreciate being kept informed of any issues and are far more likely to support you if they see you are on top of any challenges.
- Plan your marketing strategy with funding in mind. Don’t be over optimistic on just achieving best price and forget to focus on cashflow demands.
- Monitor your cashflow against budget throughout the year – be ready to react quickly to any pressure points as they arise.