When push comes to shove, you want your farm to turn a profit. All the early starts and long working days should translate into a healthy year-end profit – but that will only happen if you’ve got control over your spending, revenues and cash flow.
So, how do you address the issue of getting on top of your farm’s profitability and cash flow?
The difference between cash and profits
As we pointed out in our introductory blog post, it’s important to know the intrinsic difference between your farm’s profits and cash flow.
Cash flow is the liquid money that’s available in the business to pay your overheads, running costs and payroll etc. And being in control of your cash flow is vital if you’re going to be able to pay your bills at the end of the month.
Profit is the end product of all your hard work. It’s the margin that remains once all your other overheads and costs have been deducted and, as such, it’s the return on your investment in the farm.
It could be that you take this profit out as drawings, or it could be that you reinvest it into more livestock, more machinery or taking on more employees. But it’s crucial to realise that cash does not equal profit.
Improving cash flow
Cash-flow forecasts are an integral part of managing your farm’s financial health.
In essence getting control of your cash flow is about answering two key questions:
- How much revenue will the farm bring in this month?
- How much will the farm cost to run this month?
If your costs are lower than your revenues, you’re in a positive cash-flow situation. And that’s the ideal place to be: you can pay the bills, cover the payroll and know there’s money left in the bank at the end of the month for drawings.
With the latest cloud-based accounting software, such as Xero online accounting, it’s extremely easy to record all your sales and purchase information. And with all this information stored in the cloud, we can produce monthly accounts and cash-flow forecasts that show you exactly where the peaks and troughs are in your finances.
If cash flow is looking poor, there are various ways to give it a boost.
- Get regular customers/contractors to pay you by standing order, Direct Debit or card at the same agreed date every month – reducing late payments and improving predicted income.
- Consider direct credit transfers from the auction rather than waiting for cheques to clear.
- Focus on improving your credit control processes. If customers/contractors are paying late, chase them politely and remind them of the terms you’ve agreed.
- Look at ways to reduce your overheads, cut down your spending and leave more money in the pot each month. This could mean sourcing more cost-effective suppliers, or moving to cheaper energy suppliers etc.
Cash flow forecasts are also important if you’re looking to grow the farm and need funding or loans from your bank. Positive cash flow is a vital health check that any lender will look at before agreeing to loan money – so make sure you’re in control of this cash-flow figure.
Are you reviewing each enterprise within your farming business? Do you know the profitability of each?
Working closely with your accountant means you get access to clear, concise enterprise accounts for each area of the business. So you can see, at a glance, how your dairy, beef or mixed cattle enterprises are fairing against each other.
For example, with the margins on milk production so low at present, would it be more profitable to close your dairy enterprise and put your efforts into beef? We know you understand your running costs, but our job – as your trusted business adviser – is to help you understand your accounts and where profits can be improved on.
- Regularly review the profitability of all your enterprises and focus your efforts on those that bring in the best.
- Look at the best ways to plan your tax so it’s efficient and makes use of any available incentives and reliefs that could reduce tax costs and boost profit.
- Cut down on the contractors you use and make use of family members who can work for reduced costs or for free.
- Partner with other farms to buy expensive machinery and equipment and save on the cost of buying these items.
- Look at other markets you could diversify the farm business into – could you start a farm shop or a bed & breakfast business for the summer months?
Let us help you improve your profitability
At Saint & Co, we’ve got years of experience of working with farmers across Cumbria, SW Scotland and the surrounding areas.
We see our role as being the trusted adviser who can help you get the true potential out of your farming business. We don’t just do your basic accounts, we’re also here to provide the important numbers around cash flow and profits and to help you put plans in place to make you more efficient and more profitable.
If you’ve got big plans for making your farm more profitable, please do come and have a chat with us.
Contact your local Saint & Co office and arrange a meeting with one of our farming business specialists.