Abraham Lincoln famously said, “Give me six hours to chop down a tree and I will spend the first four hours sharpening the axe.” The key to achieving success in anything we do is preparation. Nobody could have forecasted earlier this year, the impact that a virus would have on the country both from a person and business perspective. In this article we outline some simple cashflow advice that farmers should consider to prepare their business for any cashflow pressures during these unprecedented times.
1- Anaylse past performance
Before you do your budget, you should stop and analyse your past business performance. Using a proportional analysistobenchmarkperformancecan help farmers identify areas where costs are too high. You should never look at one year’s accounts in isolation as they may not be reflective of the farm’s true performance e.g. 2018 was a high cost year for most farmers. The aim should be to spend as per table below in a good year. In a stressed year, both finance and unnecessary fixed costs can be curtailed.
Proportional Analysis of Costs
Variable Costs (Feed, fertiliser, vet etc.) - 30%
Fixed Overheads (e.g. ESB, machinery etc.) - 30%
Land Rent & Finance - 30%
2- Examine your cashflow budgets
We are seeing some slippage in markets in recent weeks, so it is important to take immediate steps to examine your cashflow from now to year end. Effectively we need to make sure that we optimise not maximise production, carefully plan the needs not the wants for the business and make sure that we invest money for short-term benefits and not just spend it without due consideration.
Prepare a budget
Keep it “live” i.e. update it regularly especially when markets are volatile
Determine what is the root cause of the cashflow pressure (e.g. herd growth or fall in output sales price)
3- Keep a Lid on Costs
Delay any discretionary spend. Non- essential capex should be postponed but investments that will yield a high longer-term return to the farm should be maintained if cash-flow allows e.g. reseeding. If you are not increasing business output (immediate cash returns), then don’t increase your investment when profits are falling.
4- Engage early with your bank and creditors
It is important that all farmers use the information from their cashflow and budgets to determine the effects that price increase or decrease is going to have on the business. All the banks have announced that they will offer flexibility to their customers, and they may be able to provide payment holidays or extend working capital facilities for the business if required.
You will need to have the last 3 years of accounts available as well as your updated budget and stock figures to hand when speaking to the bank.
Where looking at new finance or the restructuring of existing debt, care should be taken to match the term of the loan to (i) the useful life of the asset and (ii) capacity of farm to meet the repayments.
It is important to ensure that creditors such as contractor and merchants are paid so approach bank for additional working capital (cheaper than merchant credit) or speak to creditors early on to try and arrange payment plans.
5 - Consider Milk Price Management Tools
For dairy farmers, these milk price management tools or fixed milk price schemes are designed to remove the peaks and troughs of milk price by smoothing out the milk price throughout the season and sometimes over a longer period. They are not designed to help famers receive a higher or better milk prices but are a very important consideration for farmers whose businesses need some additional insulation and cannot afford a sharp drop in milk price due to recent expansion, debt levels or other reasons. The onus is on each farmer to do their homework and understand why, if applicable, they should manage their price risk and decide if the current scheme offered by their milk processor is the right option for their business.
6- Engage with Revenue
If you have concerns about your ability to pay your tax liabilities speak to the Revenue Commissioners. The most critical part of protecting business is preserving cash within the business.
7 - Government Supports for Farmers
Irish state bodies have introduced a wide range of measures to assist Irish farmers facing financial or cashflow difficulties, as a result of a downturn in their business due to COVID-19. In the table below, we summarise the measures which are currently available. Details may change as these support packages are further developed and the current situation evolves, so make sure to visit our ifac Covid-19 Resource Hub for further updates.
If you are looking to engage with your existing lender or a new lender about raising additional funding for your business or farm, contact a member of the ifac team to find out how we can help. We can guide you through the application process to help ensure a successful outcome.
Contact us at 1800 334422 or email firstname.lastname@example.org
To view our full Agri Outlook 2020 click here