A real, practical, way to manage cash flow... As requested

Newsletter #5.

Agriculture is fascinating for a number of reasons. But one that stands out for me is the way the cash flows in this industry.

Because Agriculture does not have the luxury of simply billing clients for their time, or even manufacturing products on demand and selling them right away.

In agriculture, the ‘operating cycle’ (the time from buying inputs to receiving cash), can be months or even years: you buy seeds or livestock, continue to invest time and money into this, risk it going bad or dying, to eventually sell it at an often unknown price.

Take my family’s business, which only receives cash 3 to 4 months in the year (but faces costs all-year round in production) 🌷.

To run a successful business with these dynamics, strict cash flow management is required.

So that’s why for this week’s newsletter I decided to ask what you would like to see when it comes to managing cash flow… an example it was:

And one of the best examples I can give comes from showing you how to make a Cash Forecast (a.k.a. Cash Budget, Liquidity Budget or Cash Flow Forecast).

A Cash Forecast lists your previous cash flows and contains your prediction for the future. This might sound too “simple” to have any impact, but I know that in reality we can get lost in the day-to-day operations and lose track of where and when money is coming and going.

But as I will show in this example, if you were to track cash like this you will take away a lot of the uncertainty, and likely find some unnecessary expenses where cash is simply “leaking” away.

So where do we start?

Depending on your bookkeeping software, you might be able to run a cash forecast directly in the program. Reach out to me if you want to know if this is applicable to you.

But in this example, I will show you how to set it up directly from a list of transactions. Here I’m using some hypothetical transactions from a farm that sells Wheat, Milk and Chickens. First few lines:

The only thing I add is two extra columns to identify the Week number and whether it is a Cash inflow or Cash outflow (see formulas below):

Note: these transactions already have a “Category” and a more detailed “Description”. How your transactions are classified depends on the quality of your bookkeeping process, as you won’t find this on your bank statements. The clarity a good bookkeeping process can give is well worth the investment.

Now we need to organise this information. There are many ways to do this. But a simple method I use is Excel’s Pivot Table function.

Within 5 minutes you can turn the list of transactions into this overview below. Press the link with the video to see the step-by-step!

Creating the Cash Forecast

Our transactions go back only four weeks. But it is often useful to go back at least one ‘operating cycle’ so you can see how cash changes throughout the process.

We can also decide how much detail we want. Below is the same overview but with some of the Categories expanded. The level here is again dependent on the way you classify transactions during the bookkeeping.

Understand the past

This overview will give us a good understanding of where money is going. But is also helps with decision-making. Picture this scenario:

In week 14 we see a Maintenance cash outflow of £5,000. This was unexpected and brought our cash balance below our target level. However, as we saw this impact, we were able to negotiate our rent payment to the next week when we expected Crop sales to be higher as well.

Having this information can also help us question our spending. Do we need to spend 500 a month on insurance? Was that 1000 in equipment rental worth it? Why are milk sales so inconsistent?

Knowing where money has gone and is going can help you stop a bad spiral from going out of control.

Thinking about the future

When we get a grip on where our money is going, we can start to think about the future.

We start with the planned cash flows: invoices you have sent out or received but are not yet paid, salaries, debt payments that are upcoming, and rent and insurance that is due.

Then we can make some assumptions for all other cash flows. This won’t be accurate, but it still is a powerful guide.

For instance, in our example, we noticed that we built up a nice cash balance over our target level. Because of this, we had the confidence to plan a new machinery purchase in week 19 (highlighted in yellow).

Like all financial models, this is only useful when kept up to date. It should become a weekly or monthly habit to analyse what happened, and then predict what is to come.

As you saw from the video, this does not have to take more than a few minutes.

Final thoughts

Here are some important limitations and decisions when making a cash budget:

• Pick a timeframe that works for you (weekly/monthly/quarterly). I often recommend starting as detailed as possible to understand how cash flows (and to fill the leaks!). But when cash is managed well, you can keep it at a higher level and just use it as your strategic guide.

• Don’t forget big upcoming cash outflows like debt repayments and taxes that fall outside the forecast period. Keep enough cash for that.

• Consider seasonality. Depending on your cash flow pattern, keeping this model in 12-month intervals might be better to capture all seasons.

• Adding a forecast to a Pivot Table has some downsides as it won’t update information outside the pivot table when you make changes to it. But it is easy to work around with a little bit of manual effort.

I hope you found this useful!

Just reply to this email or send me a Twitter DM if you have any questions.

And if you want to find out if I can help your agri-business, you know where to find me 🌷

Till next week!

Cheers,

Joey