10 tips on managing cashflow for dairies

Inflation, combined with sharp increases in input costs and reductions in farmgate milk prices, have put pressure on cashflow, farm consultants are warning.

“For most dairy farmers, there is insufficient excess to counteract these cost rises.

“We are now seeing an 8p/litre difference in milk prices across the supply chain, from standard contracts to models based on cost of production,” explains independent consultant Sam Evans from Sam Evans Associates.

See also: Why focus on grazing basics is key to maintaining profits

With the cost of production now hitting a high of up to 40p/litre, some dairy farmers have a 6-8p/litre deficit, and some milk contracts are not keeping pace.

Andy Dodd from WhiteAvon Consultancy says while milk prices are improving, dairy farmers are unlikely to see another high, and he urges caution.

Below, Sam and Andy advise how dairy businesses can manage cashflow.

1. Know your costs and budget regularly

Budgets and cashflow projections should be done annually, monitored monthly and updated at six-monthly intervals to reflect any changes.

Ask yourself:

• Who do you owe money to?
• When do you have to settle this debt?
• What is your relationship with the supplier?

Sam says not to ignore demands for payment, or suppliers will start sending final reminders and could threaten court action.

“If a supplier knows they will get their money, generally they will support you. Something is better than nothing.”

He says spreading large bills such as contractor costs over 12 months via direct debit, with a “wash-up” bill at the end of the year to cover any extras, can help avoid painful months with big bills.

2. Do you need to increase your overdraft?

As businesses have got larger and inflation has increased, overdraft facilities may need to be increased. This could take the pressure off cashflow (in the short term).

“If your borrowing facility is too small, it will limit your ability to buy commodities at the right time,” warns Sam, who advises farmers to reassess their needs.

3. When investing, build in contingency

Even though cashflow is tight, many farmers are still investing for the future, says Andy.

They should ensure they build in a buffer, and pay interest only on loans until the project is up and running. Then they can start paying capital back.

“Don’t assume that everything will go to plan, because it rarely does. It is a lot easier to build in that contingency and not have to draw that money, than going back to the bank cap in hand,” he advises.

If investing in new facilities, consider interest-only loans until the project is completed © Tim Scrivener

4. Shop around for loans

Andy says farmers taking out loans should negotiate lower interest rates.

He explains that banks add a margin to the Bank of England base rate. Now that interest rates have climbed, and banks are making money in other areas of their business, there is scope to get a reduced rate.

He says a client purchasing a farm for £2m had been quoted 7.8% interest (2.55% above base) by one bank and 7.4% (2.15% above base) by a second.

The 0.4% difference equates to £136,980 throughout the loan term, he explains.

“Base rate you have no control over; it is dictated by the Bank of England and will change [over time], but if you can demonstrate good credit history, you can often get the margin down, which is money in your back pocket,” says Andy.

“Even if you have been with your bank a long time, don’t be afraid to shop around. Your existing bank should want to keep your custom, so it might reduce its rate,” he adds.

5. Check you are paying the correct tax on account

When farmers pay tax for 2022-23, they must pay an amount for the following year. This is known as money on account or an advance payment.

Andy says it is worth speaking to an accountant to ensure the money you are paying on account for 2023-24 is correct.

He warns that the amount farmers paid in January will often be wrong, because it is unlikely that they will make as much profit this year.

He says they should speak to their accountant to ensure the money being paid is realistic and not overestimated.

6. Can you sell surplus forage?

There may be an opportunity to sell surplus forage stocks to another farmer or anaerobic digester plant.

“Maize is still trading at £50/t and would have cost in the high thirties to grow, so there’s a margin to be made,” says Andy.

However, he says farmers should carry out feed budgets and work in a buffer.

“Don’t sell everything, because you don’t know what this season will bring. You could end up with a short-term gain. It is always worth having a buffer.

“Maize feeds better when it’s not fresh, so having maize left over for the autumn up until Christmas is always a good idea.”

7. Use data to make the right decisions

It is often tempting to “take a bit off the cows” by cutting back on feed, but Sam warns this is short-sighted.

“You make a cash saving today, but the production cost comes later in the cycle through reduced performance. The biggest damage in a downturn is emotional decision-making to save money.

“Remember, we are dairying for the long term and the milk price will [hopefully] return to normal levels,” he advises.

He encourages farmers to use data alongside financial figures to pinpoint areas where efficiencies can be made.

“Data is critical because what you tend to find when you start recording data is you are very different to what you think.”

He says the three key areas to target that have the biggest effect on milk production are:

• Feed – this is often the largest input cost on farm
• Fertility (target a 21-day pregnancy rate of 20% plus)
• Lameness (target 90% of cows at mobility score 0-1).

8. Consider selling surplus stock

Since moving to sexed semen, many dairy farmers are rearing surplus stock. This is fine if it is being done efficiently, cash is available and it is a planned decision. Otherwise, it can be a huge drain on resource, says Sam.

With fresh calvers trading at £1,800-£2,500 apiece, Andy says selling excess animals presents an opportunity to inject some cash into the business – providing it is not shut down with TB or extra heifers are needed for herd expansion.

9. Fix feed

With feed being the biggest variable cost for dairy businesses, Andy says it is worth fixing prices at least twice a year if you are not already doing so.

“The timing of that will vary year on year. You need to keep checking markets regularly and track prices.”

10. Invest time in managing the business

With labour cost high, it can be tempting to cut down on staff. This can be a big mistake, says Andy. He advises dairy owners and managers to spend time “managing the business”.

“Paying someone £15/hour to do yard jobs to allow you to manage the business is money well spent.”