Budgeting cashflow projections for 12 months ahead is not a new concept for dairy farmers. However, it is still surprising just how many do not use any form of cash-monitoring on their farms. The bank operating their current accounts will give an indication as to where the farm is in relation to cash surplus or deficit at a particular point in time.
However, as useful as this information is, it is historic and cannot be changed. Dairy farmers need to plan ahead, in order to answer key questions such as:
Current pressure on dairy farm incomes has forced many producers to look at their cash situation and attempt to predict its impact on their business for the next six months. Keeping the budget simple and realistic is critical, and will allow accurate and meaningful projections to be made – which will help businesses to be managed in order to avoid a major cash shortage.
Working out the income is relatively straightforward for dairy farms. It is best to base this calculation on the projected calving profile for the herd, as this way you can accurately calculate milk sales or total milk solids sold each month. This will be even more accurate if the calving profile is confirmed with results from pregnancy diagnosis for the herd. Income from cull cows and calf sales will also be included in this section. However, critically, this income should only be allocated to the budget in the particular month when these sales are expected.
Deciding on what milk price to use in these projections is important, and a sensitivity analysis should be carried out on any anticipated incremental changes in the milk price received.
Many of the monthly costs on dairy farms can be predicted. Items such as wages, personal drawings and bank repayments will remain consistent. However, other farm expenses, such as meal bills, contractor charges, machinery repairs or fertiliser purchases, tend to be seasonal or a once-off.
These more irregular costs must be anticipated and allocated to the budget where they are expected to occur, in order to give a true indication of cashflow. It is important to remember that a budget is only as good as the information used to develop it. Building in personal drawings is also important, and must be based on what is actually taken each month for living expenses.
Bill Brown's farm income for June 2015 is down 32% on the same month last year. Despite this, costs have actually been reduced on the farm this year – although they are only down by 3-4% for June.
Bill is an advocate of cash budgeting and maintains it guides key decisions on farm spending. His budget for the next six months is not very attractive, especially when using a projected milk price of 20ppl. Plotting a cashflow path for the farm over the next six months has never been more important.
"If we stick to our budget, cashflow will improve for the next two months – even with cows starting to be dried off this month – simply because meal feeding is dropping and good grass growing conditions are allowing late-lactation cows to produce from grazed grass alone.
"However, I am worried about budget predictions for the winter months. At 20ppl I can’t make any money producing milk, but the budget lets me plan ahead and limit the losses,” says Bill.
He reviewed his farm cash budget last month and although farm turnover was £36,000, the cash surplus for the farm was £2,880, which is 8% of turnover.
This could be considered poor, as in May, June and July Bill would normally target a 30% cash surplus – due to the fact that with the herd on grazed grass day and night, these are usually the most profitable months of the year.
Bill acknowledges that recent land purchases and money spent on cow accommodation has added to the cost base for the farm in relation to bank loan repayments over the past 12 months.
When added to purchased concentrate and wages, these are the most significant costs on the farm. However, he maintains that while these are the major costs on his farm, they are also consistent and predictable, which makes them easier to budget for.
"I can predict the majority of farm costs with some accuracy because of forward-purchased concentrate, consistent wage bills and regular bank repayments.
"However, if the milk price was fixed for six months into the future, budgeting would obviously be a lot easier," says Bill.
He also points out that if his farm income remains 32% lower than last year’s for the next six months, he will have a major cash deficit on the farm – which will add more cost to the business if additional bank borrowings are required.
Bill is in the process of reviewing his farm budget for the winter ahead and unfortunately if the depressed milk price persists, major changes to his system will be required.
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