The build-up cashflow and peak funding

Every new enterprise spends money before it earns any. The time between the first dollar out and steady income is the build-up. The longer it runs, the more cash you need to carry it.

Two kinds of money

A new enterprise usually needs two kinds of money:

1. Capital for things that last, like sheds, yards, fencing, water or breeding stock. This is often paid for with a term loan, which is a set amount borrowed over a set number of years.
2. Working capital for things you buy and sell, like trading stock and feed. This is often carried on an overdraft, which lets your account go below zero up to a limit.

Mixing them up causes trouble. If you pay for a shed out of the overdraft, the overdraft may not come back down at sale time. Our guide to overdrafts and seasonal finance explains how these generally work.

Build it month by month

Put the build-up in a cashflow. That is a list of cash in and cash out for each month, with a running balance. Do the first year month by month, then by quarter or year. Run it until income is steady, plus a few months more.

The build-up looks different for each enterprise:

• Trading stock. A big outlay to buy, small running costs, then one lump of income at sale.
• Breeding sheep or cattle. Stock and fencing up front. Sales grow over a few years.
• A piggery. Approvals, sheds and effluent works, then breeding stock, then weekly feed bills for months before the first sales.

Peak funding and payback

Two numbers matter most.

• Peak funding is the most cash the enterprise needs at any point. It is the lowest point of the running balance. It often comes later than you think, because interest and running costs keep adding up after the build.
• The payback year is when the running balance gets back to zero. That is when the enterprise has paid back everything it cost, including interest.

Include interest on the money borrowed. Leaving it out makes every enterprise look better than it is.

Check the whole farm

Now add the new enterprise to the farm's own cashflow. Look at the overdraft at its lowest point each year. Does it stay inside the limit? If not, you need a separate facility, agreed before you buy.

Our new enterprise payback calculator works out peak funding and payback for you. The build-up spreadsheet does it month by month, and the cashflow forecaster checks the whole farm.