The importance of cash flow forecasting

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.

Farming businesses are being significantly impacted by the somewhat horrendous input prices being seen across the industry. The current high crop prices are helping to alleviate this somewhat, however, the nature of agriculture means the cash is spent long before the associated income is received and with the current inflated prices this will likely require use of short-term finance options to manage working capital requirements.

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 accurate future income and expenditure has been made much more complicated by the recent volatility of the markets, however, the cash “pinch point” positions are likely to fall at the same times each year, albeit probably more pronounced.  Identifying these points and likely working capital impacts may assist with potential supplier negotiations to agree extended payment arrangements or obtaining short-term finance, the key point is having the information available in order to negotiate.

DEFRA has recently announced bringing forward part of the payment for the 2022 BPS Claim to aid the cashflow of farming businesses, 50% of the claim will now be paid towards the end of July with the remainder paid from December, this will likely be a welcome receipt going into the arable harvest period and the subsequent cultivations for harvest 2023. The flip side to this is the larger payment normally received in December will be lower, and not forgetting the total amount will be lower than that of 2021 due to the continued phasing out of BPS.

It cannot be understated how important it is to maintain cash flow forecasts to help your business meet its liabilities as they fall due, to enable the early identification of “pinch points” giving the opportunity to seek external financial assistance if necessary.

 

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Hugh Simpson

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