16 Apr, 2024

Cashflow basics for dairy farmers amidst rainy day setbacks

In 2022, dairy farmers experienced a windfall with strong milk prices, leading to increased investment in their businesses.

However, the landscape shifted in 2023, with cash reserves tightening and some farmers having depleted their rainy-day funds. The first months of 2024 have not shown significant improvement, as cashflow continues to be squeezed by various factors, including inflation, higher interest rates, and adverse weather conditions affecting fodder, grass, and turnout dates.

It's evident that some bad habits emerged during the prosperous times of 2022, and now is the opportune moment to correct them. Here are five simple steps for dairy farmers to regain control of their finances:

1.     Create a Realistic 12-Month Budget:

  • Dive deep into your financial records to understand spending patterns and identify any one-time expenses. Reconciling past expenditures provides valuable insights for crafting a realistic budget.

  • Base your yield projections on historical performance rather than wishful thinking. Realistic estimates ensure your budget remains grounded and achievable.

  • Don't underestimate personal drawings, especially in light of rising living expenses. Incorporate a realistic allowance for personal expenditures into your budget.

  • Anticipate labour inflation of 5-10% to accurately reflect the true cost of farm operations. Failing to adjust for labour expenses can lead to budget shortfalls.

  • Make sure you incorporate tax liabilities and pension payments into your farm budget to avoid surprises down the line.

2.     Assess Essential Expenses:

  • Begin by listing down the expenses that must be met each month, prioritising necessities over luxuries. Remember, profitability doesn't always translate to cash availability.

  • Calculate the cash inflows and outflows for the current month, taking into account existing balances to determine the overall financial position.

  • Don’t allow creditor debt to build up, as this will help reduce your interest exposure with high rates of merchant credit.

  • Implementing monthly procedures for monitoring creditors and identifying overdue accounts can prevent the buildup of debt and improve cashflow.

3.     Invest Wisely:

  • If there is a surplus after meeting essential expenses, consider investing in non-essential items that contribute to the farm's productivity and efficiency.

  • Focus initially on investments that offer tangible financial benefits to the farm in the short to medium term. Whether upgrading equipment or implementing new technology like automatic heat detection, choose investments that enhance cashflow and profitability.

  • It's important to challenge proposed investments in property or machinery to ensure they align with the farm's financial goals and contribute positively to its bottom line.

4.     Examine Cost Base:

  • To enhance financial performance, scrutinise costs for potential cutbacks and savings. When was the last time you checked what you’re paying for energy on the farm? Though not always obvious, a thorough cost-base review reveals opportunities for improvement.

  • Amidst challenging times, identifying savings is tough, but diligent cash management and cost awareness enable ongoing monitoring of cost inflation.

  • Knowledge of net margins and production costs facilitates decisions around expansion plans, on-farm capital investments or can simply help to manage monthly cashflow.

5.     Review Current Borrowings:

  • To ensure financial stability, create a clear plan focusing on working capital, loan facility review, and future forecasting.

  • A budget facilitates informed decisions and bank discussions and allow you to monitor loan repayments and the effect of interest rate shifts. The increase in Euribor over the past 18 months has had an impact on loan repayments for many farmers.

As an example, borrowing €500,000 over 10 years at 4% puts the annual repayments on an amortising basis at about €45,000.

If interest rates increase to 6%, this figure rises to €52,5000/year and, at 8%, €58,500.

  • Discuss options such as fixing interest rates with your bank or changing a money market loan to a variable rate loan offering. Some banks are now offering a more competitive variable rate loan offering than the historic money market loan that you may currently be on.

Staying sharp, flexible, and clued-in is key to ensuring your farm’s viability.  By getting back to basics and prioritising financial investments, farmers can get through the cashflow squeeze and position their businesses for long-term success.