Cash and profit in the early years

Profit and cash are not the same thing. In the first few years, cash is the one that matters most.

What's the difference?

Profit is what's left over across a whole year, after all costs. Cash is the money in your bank account on any given day.

You can make a profit for the year and still run out of cash in the middle of it. That's because farm income comes in lumps. A cattle business might sell steers once a year. A sheep business might get a lamb cheque in autumn and a wool cheque once a year. The bills come every month.

Things that move cash but not profit

Some payments come out of the bank but aren't counted as a cost in the profit figure.

• Loan principal. Principal is the amount you borrowed. Paying it back takes cash, but it isn't a cost in the profit.
• Buying gear. A $10,000 bike takes $10,000 of cash today. In the accounts, the cost is spread over the years you use it. That spread is called depreciation.
• Drawings. Money you take out for living costs. It's not a farm cost, but it still leaves the account.

Tax can also change when cash goes out. That's a question for your accountant.

Find the low point

The key question in year one is: what is the lowest my bank balance gets, and when? That low point tells you how much cash or overdraft you need.

An overdraft is a limit on your account that lets you go below zero up to a set amount. You pay interest on what you use. A lender will want to see your cashflow before setting one up.

How to build a cashflow

1. Start with the cash in the bank on day one.
2. Put each sale in the month the money will actually arrive.
3. Put each cost in the month you'll actually pay it.
4. Work out the closing balance for each month. That's the balance at the end of the month, and it becomes next month's opening balance.
5. Find the lowest month. Plan to cover it with some room to spare.

Then test it. What if the sale is a month late? What if the price is 15% lower? If the low point goes below what you can cover, change the plan before you start.

Use the free cashflow forecaster to build your own. Our guide to overdrafts and seasonal finance explains how those facilities work.