Our rural business clients are finding themselves under increasing pressure when it comes to cash flow.
Recent global events and political uncertainty mean input costs, such as feed, fertiliser and fuel, as well as plant and machinery costs, are at all-time highs. The current ‘cost of living’ crisis is putting additional pressure on sales prices.
Diversification beyond a traditional farming core, for example, into new diversified enterprises, can help to spread business risk and mitigate exposure from any one particular area, but that diversification is often into uncharted areas and should be appropriately considered and planned.
Obtaining bank finance can be difficult and time consuming to secure and is often a last resort. Rising interest rates are also making existing borrowing more expensive. Despite rising interest rates, many businesses may still be contemplating that additional cushion of funds from borrowing to provide security for their business through what seems likely to be a prolonged period of pressure.
Owners of rural businesses should always try to optimise their business cash flow and cash management as controlling costs has never been more important.
1. Bank finance
If additional funds or finance is needed, discuss fixing interest rates with your bank, or an interest rate cap. Banks tend not to respond well to last-minute calls for increased credit facilities, so keep them informed and try to plan as far ahead as possible for any additional funding requirements.
Keep a careful eye on debtors and in particular, the length of time that customers are taking to settle their debts. Robust procedures should be implemented to review debtors and to identify overdue accounts (or those where there is a cause for concern), and to follow these up promptly to ensure that your business is not adversely affected by bad debt.
Suppliers will almost certainly have their own financial pressures too. Assuming a good relationship and payment history with suppliers, a regular and reliable customer could secure preferential payment terms. What if a major supplier went bust? Is there a plan b? The most should be made of the credit terms offered by suppliers, without exceeding them of course.
4. Financial management
Be aware of what is happening with the cash of the business and ensure that there is a suitable financial system to monitor this. Good accounting software which provides good management reporting is important. The outputs of the software should be reviewed and monitored regularly. We cover the benefits and considerations of cloud accounting software in our article, here.
5. Cost management
Consider where cutbacks and savings can reasonably be made. These areas may not always be immediately apparent, but a detailed review of the cost base can identify opportunities to cut back and improve financial performance.
6. Plant and machinery and investment
Make full use of existing rates of relief and allowances to make new purchases in the most tax efficient manner. Investing in the right equipment and at the right time can not only save tax and/or money, but can also improve business efficiency.
If above the VAT registration threshold, the business will now be reporting under Making Tax Digital. Ensure that VAT is being recovered on all inputs where possible. If not yet VAT registered, could registration be beneficial for the business? If selling to VAT registered customers and VAT recovery is likely to exceed the cost of VAT compliance, then registering for VAT, even if below the VAT registration threshold, could be beneficial.
Whilst it is no longer possible to elect to take the Basic Payment in Euros following Brexit, what about supplies purchased from overseas? Could it be beneficial for payment for these to be made in foreign currency?
Whilst it is important to ensure that the business has the insurance that it needs, increasing premiums should be challenged, or cover should be reduced where the business is over-insured.
10. Future proofing
Some eventualities are impossible to plan for. However, some consideration of and planning for potential eventualities and influencing factors is always good practice.
Implementing these 10 tips should ensure that cash flow, the life blood of any business, is healthy. When access to liquidity is restricted, cash management becomes critical. Cash flow management can help avoid the downside of unexpected cash calls and will give the business a commercial edge when transacting.
Businesses that can manage their cash efficiently usually require less working capital, are less vulnerable to trading peaks and troughs, and are able to extend more competitive credit terms than their competitors.
For any further information on managing your business cash flow, please contact Martyn Dobinson.