UNDERSTANDING how cash moves through a business and having adequate access to cash and credit is important for the effective management of all types of businesses.
The success or otherwise of a farming enterprise or small business can be determined by analysing the money coming in and out, referred to as cash flow.
Many business owners choose not to prepare a cash flow budget for the year or compare budgets to the actual cash flow, as they feel they do not have enough time.
Working in the business is often their priority, but working on the business is essential to financial success.
It is important to prepare a cash flow budget to make better informed decisions around a farming enterprise or small business, instead of waiting until cash is unavailable to look at finances.
A cash flow budget can help the business management team to understand and be accountable for where they are spending money during the year and to be aware of the rates they are paying.
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Many expenses, such as insurance and commissions, can increase incrementally each year. It is important to regularly reassess the rates of these services.
Understanding cash flow can also protect the business and the relationships within the business. Farmers and small business owners often work with many external parties such as consultants and suppliers, and it is important their services are paid for on time, in full.
Including these services in the budget will ensure these professionals are paid and good working relationships are maintained.
The process of preparing a cash flow budget can be simplified with accounting software. But, it is important to still understand finances before starting to put a cash flow budget together.
Setting a cash flow budget as the same figure each month is not an accurate representation of a year in business, as income and expenses will differ from month to month. Rates are often paid quarterly and insurance may be paid monthly. There are many other expenses which only occur annually.
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It is important to understand how frequently and in what amounts money comes into an account. Income in a farming enterprise often occurs in lump sums. For a regional small business, increases in income may follow the same trend as a farming enterprise or may reflect seasonal influxes.
Lining up incoming and outgoing finances will help business owners to understand when a cash flow shortfall or surplus will occur and plans can be made accordingly. A 5 per cent buffer for cost overruns can be added to a budget as a contingency to avoid shortfalls during the year.
Being informed on cash flow gives rural businesses the time and opportunity to forward plan, speak to banks about their situation and to discuss more favourable repayment terms with their creditors.
- Details: ruralbusinesssupport.org.au
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