With the way 2019 has started, no one is expecting it to be an easy year for cash flow. We are hearing from many agribusinesses that their current financial stress is high and causing increased stress in other areas of their business and personal affairs. While it is normal for cash to ebb and flow, it’s important to arm your business with strategies that can help lessen the burden.
As we discussed in a previous blog, cash flow is king when it comes to preserving working capital and a strong balance sheet. It can be your best defense when you have losses, and your best friend when you want to expand. There are already enough elements that are out of your control – input costs, weather, yields – this makes it even more important to control your business where you can.
5 Steps to Improve Cash Flow Management
While you may not be able to completely control the amount of money pouring into your farm operation, there are several ways to improve your cash flow management.
Step 1: Evaluate input costs and project cash flow monthly
- Develop a projected cash flow, preferably by month. When you know your costs and obligations by month, it’s much easier to track your line of credit or cash balance. More importantly, this helps you predict which months you will be short, so you can move expenses or revenue around to cover costs.
- Include input costs in cash flow projections:
- Input costs, like seed or fertilizer
- Loan payments
- Family living expenses
- Short-term machinery needs
- Breeding and other livestock purchases
Step 2: Determine what expenses to defer and cut waste
Once your expenses are lined out, determine what items you can defer to another month or completely do without. For example, can you get by with less labor, family living expenses or large capital expenditures this year? This is the time to ask the hard questions.
One word of caution: Make sure you are aware that cutting certain costs may also create a reduction in revenue. For example, don’t just cut fertilizer because it’s a high input cost. Greater yields may be the ticket to boosting your profit margins in a low commodity-pricing year. Instead, look for waste before you cut items that cut revenue.
Step 3: Plan for when revenue will occur
- Know the basis of commodities you grow and when they are favorable for you.
- Utilize good risk management strategies to create a price floor.
- Find ways to increase short-term revenue, such as custom work or other farm services.
Step 4: Model your cash flow and apply different scenarios
Finally, take all the above considerations and begin to model your cash flow with different scenarios and sensitivity analysis to determine strategies.
For instance, try modifying the corn price and yield or timing of grain sales. See what happens to the cash flow for that scenario. It’s smart to run different scenarios at different times of the year, before you reach fall harvest with your line of credit maxed out.
Step 5: Evaluate factors that can help or hurt your cash flow
- Tax consequences
- Farm Service Agency (FSA) guaranteed loan programs
- Consider liquidating machinery to raise cash and lease it back at a lower cost
- Re-negotiate cash rents when possible
- Sell a non-income producing asset, such as a boat or motorhome
- Know your cash flow by commodity to help determine your crop mix options
- Work with your suppliers and vendors for discounts or timing of payments
- Talk to your banker about short- and long-term financing as well as fixed rates to make sure you are paying the least amount of interest possible
Should you have questions or need guidance surrounding cash flow management and financial planning, tax strategy, FSA programs, farm management services, or bank negotiation, contact a K·Coe Isom advisor.