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Cashflow Management

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.

 

Countryside Stewardship

The Countryside Stewardship (CS) Scheme is settling down into a more farmer-friendly option after a wobbly start last year which saw a startlingly low rate of applications.

Clearer guidance notes and a longer application window are among measures introduced to create an easier application process for this scheme to improve the farmed environment for wildlife and reduce diffuse water pollution.

The recent removal of the £5,000 minimum claim value for Mid Tier applications has also opened up the scheme to the many farmers who were previously excluded.

Defra went on a charm offensive in a bid to attract more applicants this year, issuing a series of “myth busters” to break down what it called the “common misconceptions” surrounding the Scheme.

The fact remains that the application forms and guidance notes are undoubtedly unwieldy – stretching to 1,600 pages – which has farmers understandably weighing up reward against the time taken to apply.

There is no “one fixes all” approach, either, because differences in terrain, soil type and wildlife, coupled with regional environmental priorities, mean each application must be compiled individually, and is assessed on its own merits.

The window for Mid Tier applications, which replaced the old Entry Level Stewardship, is already open and will remain so until 30th September. This quite significant extension means applications can be in before harvest, and our consultants have more time to liaise with farmers and farm managers.

Farmers obviously know their land best, and our consultants are experienced in pinpointing the best options in terms of financial reward in what is a competitive application process, so together we can hone a successful application.

The extra effort can result in a fixed five year income, which is much-needed in the current climate. Payments are made in the Autumn, which particularly helps with cash-flow.

There are three main elements within countryside stewardship:

• Mid Tier: Five year agreements for environmental improvements in the wider countryside, including multi-year management options and capital grants.
• Higher Tier: Five year agreements for environmentally significant sites, commons and woodlands requiring more complex management, including management options and capital grants;
• Capital Grants: a range of 1-2 year grants for hedgerows and boundaries, improving water quality, developing implementation plans, feasibility studies, woodland creation (establishment), woodland improvement and tree health.

Most of the packages and options are scored against specific criteria, so not all applications are successful. There is a mix of compulsory and optional elements, with bundles of options or combinations of packages available.

Applications are ranked according to score, with farmers competing against other applicants for the payments. The competitive element was introduced to focus effort and resources where it is needed, so the Scheme has greater environmental impact.

Applicants should first look at the local priorities for their area, and use the list to select options and capital items closest to the environmental priorities for their region. To achieve a high score, farmers should ideally add items from all the tiers, including the Higher Tier option, which makes for a really competitive application.

Mid Tier applications will score higher if they follow the Farm Wildlife @ Wild Pollinator Package, are endorsed by Catchment Sensitive Farming (where applicable) or are part of a Facilitated group.

Defra has pointed out that CS areas can still also be used to meet “greening” payment requirements. It says some CS land management options can be combined with greening – for example, buffer strips – but the CS payment for these areas is adjusted to avoid “double funding”.

Farmers might consider grouping together to apply for a separate Facilitation Fund to support those who co-operate in large-scale stewardship projects. These should be at least four adjacent farms, covering a minimum 2,000 hectares, and can bring enhanced financial reward.

In summary, farmers should take a serious new look at the CS Scheme. Farmers should and do take very seriously their duty to protect and improve the land as custodians of the countryside. This Scheme gives them a real chance to make effective environmental improvements in their local area.

How independent benchmarking can benefit your farm

Drive through the countryside with any farmer and you’re almost guaranteed a passing comment on the surrounding crops. Scathing or otherwise, we all judge ourselves on the job in hand by comparing our success against the performance of others.

Others will visit, read or watch how different farms operate across the country, drawing lasting impressions often affecting the way they themselves grow crops.

Benchmarking can bring specific detail to watching over the hedge and is perhaps the most valuable tool for pinpointing different practice and anticipating future trends.

Wilson Wraight has been benchmarking data on an independent basis for more than 15 years, using business performance data gathered from hundreds of our clients.

Today that database forms a vast resource which underpins analysis and advice.  It provides valuable insight into the underlying trends, putting into context year-on-year income and cost variations. Comparative summaries give different measures of performance, including gross margins, yield and operating costs across different farming scales, practices and soil types.

We input and manage data ourselves on a single database and to our own criteria.  It’s an impartial, fair and consistent method which leaves no room for misinterpretation, making it extremely reliable.

Farmers receive individualised, comparative information allowing them to benchmark their enterprise against other businesses on both a financial and productivity basis.  Only they can see information relating to their farm; all data in the public domain is released on a confidential and anonymous basis.

The summaries are displayed in graph form, colour-coded for ease of interpretation.  Farmers can relate to specific information identifying changes such as funding requirements, whilst comparing their costs and yield with other similar farming ventures.

As illustrated in Graph 1 below, yield (the purple line) is not the main factor in determining good gross margin (yellow bars).  Instead, overlay the wheat value per tonne (graph 2) for the last ten years onto graph 1 and you will see a far stronger correlation.

The focus of today’s more successful farmers is moving away from yield chasing and towards margin managing.  Effective crop marketing is essential and farmers must be aware of all options available to them when forming a grain sales policy.

Interestingly, the first graph shows spray costs have remained high for the last few years regardless of the season, yet we have had some years of high disease and extreme low disease.  In 2013 many untreated trials performed better than those with expensive fungicide programmes, yet a pre-emptive protection programme can remain costly.

When benchmarking shows we’re not getting the right margin, we ask questions.  It might be that the farmer needs to review suppliers, for example, or his seed outlay, or look to make improvements to his storage procedures.

We also interpret the data to estimate performance during 2016, which again allows farmers to anticipate and better manage their farm’s yield.  The faded forecasts on the graphs are formed from the following factors:

• A more average yield is forecast which, combined with poor prices could see a below par gross margin performance at around 2009 levels, when the average sales price was £108/tonne.  The last similar level was reached in 2006, when wheat averaged £82/tonne.
• Costs for fertilisers are expected to reduce slightly as the price of Nitrogen continues to fall; however, an increased use of compound products and large amounts of milling wheat planted compared to previous years could curb some savings.  Spray expenditure is expected to rise with inflation in many cases.  Overall spray expenditure in recent years has been less reactive to growing problems in crops but more precautionary which consolidates a high level of cost regardless of the season.

Every client using our budget and report service receives a hard copy of his or her own personal data every year, presented in acres or hectares, depending on their preference.  They also receive performance data of other crops, so they can be fully aware of the latest performance figures.

The service is also particularly useful in the case of contract farming, so landowners can assess how contracted farmers are performing.

Farmers who use Wilson Wraight budgeting and reporting tools can utilise this rich database to make well-informed decisions.  The trends information can help them budget and plan for future years, measuring and predicting income and costs to help them set realistic performance targets.

Each farm is unique – but benchmarking is an extremely valuable way of pinpointing where improvements can be made.  It’s one of the many tools we draw on to give specialist analysis and advice, tailored to bring out the best in every venture.