Where does all my cash go?

Farmers are experiencing increasing cashflow pressures as inflation in agriculture rose to 23.5% in July 2022, according to Andersons . This saw input costs continuing to surge at a faster rate than output prices. When comparing agricultural inflation to the current annual inflation rate in the UK (which rose to 10.1% in July 2022), it is easy to see why the agricultural sector is suffering more than other industries, at more than double the general UK rate.

To combat against this, on 6 May 2022 Defra and the RPA announced that direct payments of the Basic Payment Scheme (BPS) in England would be made in two equal instalments. The Government hoped that bringing forward half of this year’s BPS payment would give farm businesses an advance injection of cash, which would not affect farm profitability, to help farmers to make business decisions with more confidence and pay the increasing bills as they fall due this Autumn.

The RPA also confirmed that this new method of payment would be here to stay for the remainder of the agricultural transition period, up until 2027. This includes future BPS payments and delinked payments when introduced in 2024.

In most cases, the first of these two equal instalments have now been paid with many having received this in the first fortnight of August and the remainder of the payment to follow in December. Farmers in Scotland will receive most or all of their BPS payments in October, with any balance due being paid in December. This is quite the change from receiving the full payment at the start of December, which had been the way for many years with farmers getting used to and having sufficient plans to cope with. Although a welcomed boost to cashflow, this is somewhat a small silver lining as 2022 BPS payments are seeing a reduction of between 20% to 40%.

It is also worth noting that other organisations such as Arla have adopted a similar method of splitting annual payments. Starting this year they will be paying their 13th milk payment in two instalments; a mid-year payment in September followed by an end of year payment as usual, instead of passing it to producers in total at the end of each milk year.

The difference between profit and cash

Whilst profit is often the main focus when reviewing your latest set of accounts, movement in cash balances are equally as important. The business may be making a profit, however in some circumstances you may find that cash balances are decreasing at the same time and struggle to see why. To help understand this, it is useful to look at the differences between profit and cash in a set of agricultural accounts, the following are some of the most common examples.

Movement in the values of your opening and closing stock from the start of the year to the end is one of the main reasons. For example, if your closing livestock is valued higher than it was at the start of the year, this will increase your accounting profit but not your cash balances. Currently, many farmers are experiencing an increase in closing stock values in their accounts as input costs increase and thus the resulting selling price increases. Also, growing businesses that are increasing their livestock numbers may find that their cash balances decrease during the year because it is not just the valuations which affects the closing stock in the profit and loss account, but also the movement in numbers.

Repayment of loans or other finance obligations cause cash balances to decrease, but the payment is not fully reflected in the profit and loss account. Loan repayments are split into two parts, interest and capital. The interest amount, usually a smaller proportion, will be expensed to the profit and loss account. However, this amount may be increasing for many on a variable rate loan as the Bank of England once again hiked up the base rate in August 2022 to 1.75%; the highest rate since January 2008. Whereas the capital repayment will not be expensed to the profit and loss account but instead reduce the amount owing on your balance sheet
and thus will decrease cash balances but not the accounting profit.

Finally, the cost of new machinery and buildings are not expensed to the profit and loss account in the year of purchase, but instead depreciated over their useful economic life. A depreciation charge is made each year to allow us to expense the cost of the asset over its useful life to the profit and loss account. This yearly expense will be much less than the large initial cash outlay. This is also the case for capital purchases made via the use of a loan or finance as the cash repayments made will not match the depreciation expense in the profit and loss account.

Cashflow will remain at the forefront of farmers’ minds this Autumn and forward planning will be vital. Cloud Accounting software will continue to be a very useful tool, as it will allow farmers to plan their future cashflow with the use of budgetary tools and comparative figures within the software.

If you have any questions or concerns, Dodd & Co are always on hand to help.

Click here to read other Autumn Farming Newsletter articles.