Cash Vs Profit

In last year’s Cost of Production report which we publish with Old Mill Accountants, I was warning dairy farmers of significantly falling incomes due to milk price decreases, which in the end were a lot more severe than we budgeted due to the delay in milk prices beginning to increase.  The high cash demands of paying tax and repaying the larger capital investments in 2022-2023 coupled with a rapidly falling milk price (-£210k for our average producer analysed)  has caused a major cashflow crisis in the dairy sector in the last six to nine months for those who haven’t managed the large profits of the previous year.

This year it is moving in the opposite direction!  Now that milk prices have been increasing for the past ten months, cashflows have still been deteriorating.  Though we are forecasting a significant turnaround in profit for the year ending March 2025, it doesn’t feel like that looking at current cashflows at farm level.

This highlights the importance of knowing the difference between cash and profit in a business and managing both.  Cash is the more important of the two shorter term, profit the more important long term.  All of our clients where we or they have updated cashflow forecasts to at least the end of March 2025 are seeing a much more positive financial position in terms of profit and cash in six months’ time.  Here we have projected average profits to be £590/cow on a milk price paid of 45ppl.  Unfortunately, without the benefit of cashflow budgeting I have seen some businesses make short term decisions (e.g. selling bulling heifers to buy fresh calved cows) in a long-term business.

So beware, as profits are rising again with increasing milk price, cashflow may still be tight but profits may be high enough to incur a larger tax bill to March 2025, unless you are planning 6-12 months ahead.  What is your strategy to cope with the volatile milk price?  Have you updated your budget to March 25 now that we are over halfway through the financial year?  Are you controlling cashflow or is it controlling your business?

The Cost of Production 2023-2024 can be viewed here - Another Year - Similar Conclusions! - Farm Consultancy

Contact Gerard at gerardfinnan@fcgagric.com or Tel 07976 426420, to look at strategies to manage a volatile cashflow income.