Budgeting and cash flow forecasting for farmers in uncertain times

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For farm businesses, it is difficult to predict what will happen in 2026 or beyond. The only certainty seems to be that commodity prices will continue to fluctuate wildly – the recent fall in milk prices being an unfortunate example. More extreme weather patterns are also likely to impact crop yields, selling prices and input prices, while gas, oil and fertiliser prices have risen as a result of escalating conflict in the Middle East.

Focus on what you can control - budgeting and forecasting

In uncertain times, you must focus on what you can control and run your farm proactively. You can’t set the milk price, and you can’t make it rain – but you can decide how to actively manage your cash.

Key to this is preparing budgets and cash flow forecasts, and the main benefit of doing so is that it will give you a better understanding of likely tax bills. If things are looking healthy, don’t forget that next year’s tax bill will be higher. If profits are likely to be lower, we may be able to reduce payments on account. For example, the recent significant price reductions for milk mean that whilst profits in 2025 and 2026 will have been good, by the time the tax for 2026 becomes payable in January 2027, dairy farmers will have endured 12 months or more of very poor prices, with cash flow facing substantial pressure as a result.

Having an annual budget and then reforecasting every quarter throughout the year (or monthly during volatile periods), will help you gain a better understanding of your business. By understanding your cash flow, if something changes in your business, you can quickly assess the impact on your cash. You can also test your exposure if the market moves with alternative figures, for example, lamb prices at £20 per head higher or lower, or bought-in feed £50 per tonne higher or lower.

A cash flow statement can predict pressure points on your bank overdraft and allow you to plan ahead.

Talking to your bank in good times is essential if you need some additional support, rather than waiting until there is a real need for extra funding. Whilst strong land values can provide the collateral, banks are primarily concerned with serviceability. In other words, is the business generating enough cash to service its borrowings? Budgets and cash flows will help support any application for additional funding.

Why profitable farms can still run short of cash

Businesses can get into difficulties because of a lack of cash rather than a lack of profit.

Causes of this can include:

• Overtrading - Rapid growth often consumes cash before it generates it. More is spent on buying new equipment, increasing stock levels and perhaps increasing staff. The costs usually come before the profit on increased sales is realised, which can lead to cash shortages and in acute cases, failure of the business.
• Increased stock numbers and values - A business with an extra 100 sheep at the end of the year will have purchased them or spent money rearing them. This does not affect the accounting profit, but will impact on your cash flow.
• Machinery and buildings - Capital expenditure is depreciated and written off against profit over several years. Ideally, repayments on finance to fund expenditure should be matched to the period over which the asset will produce income.
• Private drawings from a partnership – If your drawings regularly exceed the profits being made, your cash flow will be squeezed.
• Debt that cash flow can’t support - A business not generating sufficient cash to cover loan repayments, drawings, and increased working capital will experience cash flow problems. It is tempting to try to repay a bank loan over as short a period as possible, but you have to be realistic about the cash you have available.

Having a clearer picture of your business's numbers and cash flow will put you in a much better position to make decisions when external pressures hit and avoid the scenarios listed above.