The overdraft and your lowest month

An overdraft lets your account go below zero, up to a set limit. On a farm it carries the business between sales. You pay interest on the amount you use, and some lenders also charge a fee for having the limit there. Your facility letter, the bank's letter setting out each loan, has your real terms.

The number that matters most

Once your cashflow is built, look along the closing balance line and find the lowest one. That's your lowest month, sometimes called your peak need.

The year as a whole might look fine. But bills are paid month by month. If the lowest month sits right on the limit, there's no room for a late sale or a big repair bill.

On a livestock farm, the lowest month usually comes just before the main sales. For cattle that might be before the autumn weaner sales. For sheep it's often just before the wool cheque. A piggery sells every week, so its low point often comes when grain prices jump, because feed is the biggest bill.

How much room is enough?

There's no single right answer, and the bank makes its own call. A sensible place to start is room for about a month's normal payments under the limit in your lowest month. That way a sale held over by a few weeks doesn't push you past it. Then think about your own risks, such as a slow payer or a dry autumn.

Does it swing back?

An overdraft is meant to swing. It goes deeper while costs go out, and comes back after sales. Check that your balance climbs back after the main sales. If the best point all year is still well into the overdraft, that part never clears. It's called hardcore debt. It often means long-term spending, like machinery, went on a short-term facility. Our guide to overdrafts and seasonal finance explains what to do about it.

Test a poor season

Now run the cashflow again with lower prices, say 15% off every sale, and higher feed costs. The season stress test does this for you. Watch two things: whether the lowest month still fits under the limit, and where June finishes. A poor year often hurts most the following year, because you start July deeper.

Before you need it

If the lowest month is too close to the limit, talk to the bank before it happens. Options might include a seasonal increase in the limit, selling some stock earlier or putting off a purchase. Whether the bank agrees is up to the bank, but a plan on paper makes the conversation much easier.