The importance of cash flow forecasting in agricultural businesses

by Hugh Simpson

“Cash is King” is a phrase often heard in business, the underlying meaning being that you can’t spend what you don’t have.

We are in a period of significant uncertainty and most businesses across the country have been impacted by Covid-19 in one way or another; for farming businesses the uncertainly from the virus has only added to the perennial uncertainty of income from agricultural production. There is little doubt that for many diversified rural businesses, income has taken a significant hit of late, but unfortunately the bills are still piling up, how can businesses look to ensure their continuation in the months ahead?

Planning, more specifically cash flow planning by preparing forecasts, is the only way for a business to identify its future cash position. Preparing budgets and cash flow forecasts is advisable for any business (sometimes mandatory when obtaining external finance) but in the current times, forecasting could not be more important.

Predicting income at the moment could be almost impossible for some businesses, however, business owners will almost certainly be able to predict most of their short-term expenditure. Identifying these likely costs will help to isolate the cash “pinch points” and this information may aid potential supplier negotiations to agree extended payment arrangements, the key point is having the information available in order to negotiate.

The government has initiated various financial packages since the start of the pandemic aimed at providing support to businesses that have been impacted by Covid-19. All these packages are centred around protecting the economy by helping businesses meet their short-term expenditure commitments, specifically those of business overheads such as rent, rates and employee costs. Other forms of assistance have also been announced, enabling businesses to defer tax payments; the most prominent being deferring some VAT liabilities to 31 March 2021 and the 2nd payments on account for income tax until 31 January 2021.

It goes without saying that any deferments are short-term measures and just kick the costs down the road but maintaining and updating a cash flow forecast is paramount in helping your business meet its liabilities as they fall due.

Author

Hugh Simpson

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