Small businesses often fail because their managers don’t understand or manage the finances properly. The foundation of your farming business is financial management and cash flow is an important part of this.
Budget forecasts for the season ahead are only possible if you – the farmer – know what your cash flow has been for the previous year. Remember, if you want to borrow money you must present the bank with a budget forecast based on a solid cash flow history.
CASH FLOW PROJECTIONS
The forecast (or projection) is what you think will happen in the year ahead. You can’t be 100% accurate, but you try to get as close as possible so that your figures will be realistic.
CASH FLOW STATEMENT
The cash flow statement is 100% accurate. It shows how much money came in, and when, as well as how much money went out and when. It is vital for good management. The cash flow statement shows how much control you have over your finances and where you are making mistakes.
The money coming into your business comes from your debtors – people who owe you money for produce you have sold them. It makes sense that money owed to you must come in as fast as possible.
If the statement shows less money than the projection it means your estimates were too high or your debtors aren’t paying quickly enough. Most small-scale commercial farmers manage cash businesses but the principle is the same. Cash paying clients are the effective debtors.
There’s no real reason for your estimates to be too high – you should have been guided by your history and it’s better to err on the side of caution.
Statement income too low? Ask these kind of questions. Was the crop smaller than estimated? Were you on track with farming practices? Were market prices lower than expected and if so why? Did you maintain crop quality standards? Do your clients owe you money? Did you suffer loss through animal mortality? Was your labour higher than you had budgeted for?
The information you need for the income section comes from bank deposit slips, statements and invoices to clients. Don’t deposit cash without the appropriate backup invoice. It’s income, not something you can put in your pick-up truck ashtray as a kind of handy cash float.
Creditors are the people you owe and your cash flow statement will tell you how much you owe them and when you are paying.
Payments must not exceed income.
The information in your creditors’ column comes from suppliers’ invoices and your bank statements.
If you have an overdraft, calculate the interest as an expense.
When you work out your expenses include everything no matter how small. It’s a good idea to keep a separate list of weekly payments which you put together for the monthly cash flow figures. Doing this allows you to make payments or hold them depending on what is happening to your cash flow.
It’s always good business to speak to a creditor if you know you are going to be late with a payment. The worst thing you can do is say nothing. Put yourself in his or her shoes – someone owes you money, he doesn’t pay you and he doesn’t contact you. What would you think?
OPENING AND CLOSING BALANCES
The first figure you enter under January on your projections sheet is the actual amount in your bank account on 1 January. Everything after that is an estimate.
Remember, the cash flow statements will show the actual amounts that went through your bank account.
If there is money in your account you write down the amount; if you owe the bank money you write down the number with a minus sign in front of it.
The closing balance is taken on the last day of the month and that amount is transferred to the opening balance of the next month.
Set aside time to work on your figures once a week.