Day 2: cash and the bank

Profit and cash are not the same thing. A farm can make a profit for the year and still run short of cash in the middle of it. That is because farm income often comes in a few big cheques, but bills come every month.

Words about cash

Cashflow forecast. A month-by-month list of the cash coming in and going out, with the bank balance at the end of each month. It shows whether the business can get from one sale to the next.

Opening and closing balance. The opening balance is the bank balance at the start of a month. The closing balance is the balance at the end. Each month's closing balance becomes the next month's opening balance.

Low point. The lowest the balance gets during the year. It tells you how much overdraft you need.

Drawings. Money the family takes out of the business for living costs. Banks look at drawings closely, because the family is paid out of the same cash that pays the bank.

Words about the bank

Overdraft. A facility that lets your account go below zero, up to a set limit. Interest is charged on the amount you use. Check your own bank's fees.

Headroom. How far the balance is from the limit. If the limit is $80,000 and you are $70,000 overdrawn, the headroom is $10,000.

Seasonal facility. A short-term limit to cover the months when costs run ahead of income. It is usually expected to be cleared by a set date.

Working capital. Current assets less current liabilities. Current means due, or expected to turn into cash, within 12 months. It is the money available to run the business.

Current ratio. Current assets divided by current liabilities. It is a quick test of whether the business can pay the bills coming up.

Annual review. The bank's yearly look at your loans, using your accounts, budget and cashflow.

Facility letter. The bank's letter setting out each loan and overdraft, with limits, rates, fees and conditions. Keep it somewhere you can find it.

Where to start

Find the farm's overdraft limit and last year's low point. Ask when the big cheques come in, and when the big bills go out. That one conversation explains a lot about how the farm runs.

Try the cashflow forecaster to see how a few months fit together. The household drawings tool adds up what the family takes out.