Agriculture and cash flow – Striking the balance

By Chris Wright, Partner and ARA specialist

Managing cash flow is essential to any business, but it is particularly important for the agricultural sector, which has a unique set of challenges when it comes to managing incomings and outgoings.

Our agriculture specialists are here to explore some of our top tips to maintaining a healthy cash flow and keep your business resistant to unexpected challenges.

Understand cyclical cash flow

The cyclical nature of farming, alongside the unpredictability of the weather and market prices, can lead to significant fluctuations in income and expenses.

One of the first steps in effective cash flow management is acknowledging and planning for the cyclical nature of agriculture.

Income might not be steady throughout the year, so it’s essential to budget for periods of low cash flow.

Creating a detailed budget that accounts for seasonal variations in income and expenses can help manage these fluctuations.

This budget should include all known costs, such as seeds, fertiliser, and labour, as well as an allowance for unexpected expenses.

At more fruitful times of the year, you should also plan to maximise profit in order to finance less profitable times.

Be cautious of operational costs

Operational costs can vary significantly throughout the year, so a particularly effective cash flow strategy is to manage these costs carefully through the efficient use of resources.

For example, consider spending time taking stock of your manual processes and identify those which could benefit from automation or streamlining, to give you more time to devote to labour-intensive work.

Another approach is to explore flexible payment terms with suppliers and creditors.

This can help align outgoing payments with income patterns, easing the pressure during leaner months.

Additionally, maintaining a good relationship and ongoing proof of solvency with lenders and banks can provide access to overdrafts or short-term loans to cover temporary cash shortfalls.

Plan for capital investments

Capital investments, such as purchasing new equipment or expanding farm operations, require significant expenditure that can impact cash flow.

These investments should be planned carefully to maximise tax reliefs and ensure you have some cash left to cover unexpected expenses.

For example, if you plan to make a major purchase, consider whether you have used all of your Annual Investment Allowance (AIA) of £1 million.

If you have, consider delaying the purchase until the next tax year when your allowance will reset.

Alternatively, you may consider bringing forward a purchase to benefit from tax reliefs sooner.

Embrace technology and diversification

Technology can play a vital role in managing cash flow more effectively.

Cloud accounting software can help track income and expenses in real-time, providing valuable insights into cash flow patterns. This can help you make informed decisions to up-to-the-minute data.

Finally, consider diversification.

By diversifying income sources, for example, through agritourism, selling value-added products, or leasing out land for renewable energy projects, you can reduce your risk by drawing income from a number of sources.

We can help you to plan whether diversification or investment is right for you in your current financial position – and how to get there in the future.

Need to know more? Contact our agriculture team today.