Why Prepare a Cashflow Budget for Your Farming Enterprise

Posted 4 Feb

Why Prepare a Cashflow Budget for Your Farming Enterprise

Regular cashflow forecasts help you make informed decisions and are important regardless of whether your farm is in growth mode, expansion or just trying to stay afloat.

Put simply, a cashflow budget measures the amount of money coming into a business against what goes out and when. It is most common to break this down into monthly budgets across multiple years. It’s important to have a forward estimate of monthly cashflow and to review monthly actuals against the estimated figures.

Having a monthly cash flow budget is particularly important for financiers. Financiers look at the following when reviewing cashflow budgets:

• Can the client make loan repayments as they become due?

• If the client has an overdraft, when will the peak overdraft requirement be and in what month will it most likely occur, so they can plan for credit requirements.

Developing and monitoring a cashflow budget is not all about a financier’s needs. It can provide you with a lot of useful information. Understanding and managing the timing of payments and income can help minimise the use of an overdraft and therefore decrease overdraft interest costs. It can also provide the farm with an early indicator of how much additional finance might be a needed following an unfavourable season or what production adjustments need to be made to increase cashflow or what impact changes in commodity pricing has on the bottom line.

Cash flow budget can be very helpful in evaluating and planning for major capital investments such as purchasing land, building new facilities, or expanding production.

While there may be some effort in compiling your budgets initially, once done, they become pro-forma for future years. They are also an important way to monitor and review what has happened during the year. It’s your farm plan in monetary terms.

To get started there are some keys steps to consider prior to developing your cashflow budget.

• Outline your tentative plans for livestock or crop production for the year.

• Take an inventory of livestock on hand, crops in storage now, feed available etc.

• Estimate requirements e.g., livestock feed requirements, pasture improvements or cropping input costs.

If you’d like to know more, contact us at WDF Professional to discuss how we can help you with cashflow budgeting for your farming enterprise.

As accountants based in Wagga Wagga, we don't just crunch numbers and put figures in boxes, we provide a carefully researched and tailored accounting solution that suits each of our clients.