What to do if cash is running out

It’s that time of year when it is good to look back at finances of the last 12 months and plan cashflow and finances for the year ahead. But no matter how well you plan, there are times in which cash may be tight.

Some of this may be in a farmer’s control, such as productivity and managing costs and efficiency, but often it is out of a farmer’s control, such a commodity price fall or poor weather affecting performance.

Some of the warning signs that cash might be tight are when the milk cheque is spent before it is lodged

If the farm had a good year this year, a reserve can be built for necessary on-farm improvements. If the year has not been so good, money must be managed to ensure all essential bills are paid.

Some of the warning signs that cash might be tight are when the milk cheque is spent before it is lodged, the bank overdraft is increasing or the balance in the co-op or merchant account is increasing.

If this is the case, it is best to try get to the root of the problem because a shortage of cash is a symptom, not the underlying cause. Firstly, it is important to identify if it is a short-term problem caused by a product price collapse (such as low beef prices) or the volume or cost of inputs rising – such as buying extra fodder or rising meal prices.

The summer of 2018 was unique and put pressure on cashflow, but it was a once-off. In most cases, the underlying business is essentially sound and will recover when conditions improve. But access to additional cash may be needed to tide the business over in the short term.

One of the most important things to do once you understand the reason why money is tight

However, it is important to identify if there is longer term cashflow problem, for example if cash is always tight, or if the farm has below average profitability. This may be because of below optimum output or yields, or farm expenses which are above the norm, or there is not enough cash being generated to provide for living expenses.

One of the most important things to do once you understand the reason why money is tight (because of a long-term or short-term issue) is to match the timing of cash outflows to periods of cash surplus.

If there are short-term credit options available such as bank overdrafts or merchant credit, these can be used. Remember, some forms of credit can be very expensive, such as merchant credit. Banks in general are the cheapest source, as it is their business to lend money.

The main priority is to minimise all non-essential spending until cash income improves

If there is a problem managing debt, it is important to recognise it early and contact your lender to see what solution can be found. The main priority is to minimise all non-essential spending until cash income improves.

On the other hand, extra cash could be added to the budget. For example, can some stock be sold or what about selling some surplus breeding stock? Sales could be brought forward or purchases could be deferred. Examine loan repayments and make sure they are happening at the right time to match cash inflows.

In more extreme cases where the above items have been explored, it may be worthwhile to release equity in long-term assets such as land, machinery or buildings to refinance these if the need arises. Payments can be scheduled over several years instead of being all due in one year.

This could cut payments by significant amounts if they are not structured correctly

On this, it is always important to structure bank loans over an appropriate time.

It also might be worthwhile looking at lengthening the repayment period on term loans. This could cut payments by significant amounts if they are not structured correctly. Of course, more interest is paid in the long run.

Finally, it is important to look at non-farm spending and to try and decrease these where possible. Postpone investments in vehicles and non-essential assets.

No matter what; there are plenty of options if it is found the farm is running out of cash.

The important thing is to identify the problem early, talk to your bank or financial adviser and work on a plan for the coming months.