There is a fundamental difference between reduced profitability and cash flow pressure. You will only struggle for one reason: your business will run out of cash. Overdraft facilities will be reached, yet you will still have bills to pay. Certain commitments – such as finance payments – need honouring, and some costs, such as feed and veterinary bills, will be more important than others.
A reasonably profitable farming business that buys an unusually large amount of stock will hold its value in assets rather than cash. The saying: “Turnover is vanity, profit is sanity and cash is king” has never been more relevant.
Often farmers have borrowed to invest in the business, perhaps to buy additional land or new buildings, and in many cases they have set themselves what are turning out to be unrealistically short time scales to repay the debt. The cash flow balance may have been manageable in the best years, but now that businesses are coming under pressure, they simply cannot continue to service those debt repayments.
Rather than worry about where to find the cash now to pay essential bills, farmers should instead restructure such loans to spread the payments over a longer period. Provided any such rearrangements are born out of a need to correct what was probably an inappropriate lend in the first place, banks should have no objection to restructuring loans. We’ve seen a number of banks waive any new loan fees where restructuring takes place, which is encouraging.
It’s important to draw up a cash flow forecast and speak to your bank early to allow time for arrangements to be put in place. Saying nothing and hoping for the best is not a strategy that’s likely to succeed.