“Cash is king” is an expression that has been used to refer to the importance of cash flow in the overall fiscal health of a business. While the many components of your operation’s financial health can be complex, often it can be the most simplistic things that can help generate cash.
Cash flow — the cash that moves in and out of your farm – can be controlled in four key areas. We see it time and time again, when farmers don’t pay enough attention to these areas and don’t manage where their money is going, they lose an easy opportunity to help their operation thrive or to avoid running out of cash while trying to grow.
Peter Martin, a finance and growth consultant for K·Coe Isom, advises farmers to monitor these areas of their operations to help boost cash flow:
- Examine expenses to increase profitability.
The best farmers look at expenses – line by line – and cut the fluff. Follow suit and examine what you’re spending for major inputs such as labor, seed, chemicals and fertilizers. Don’t ignore a single line item. Even your phone bill can add up to surprisingly high levels when you consider all the cell phones and data plans your business pays for. You can probably shave down even those costs. Also, compare your input expenses to what your competitors are paying. Your bank, your accountant and others can help you with those comparison numbers. Many businesses are even engaging third parties to examine their expenses, question their necessity and point out whether those costs are out of line with what others are paying.
- Clean up financial structure to gain more financial leverage.
Meet with your banker, and even a second lender, to see about optimizing your debt structure. Has your operating line of credit gotten mucked up with old debt? With the past two years of farm losses, carryover debt has become a significant concern. Can you clean up your debt? Refinance? Get a better interest rate? Whether you’re in survival or growth mode, make sure your financial structure is the best possible to maximize your collateral and borrowing capacity.
- Monitor equipment needs and assets with efficiency.
Consider whether you’re using your assets wisely. Do you have too much equipment? Did you buy a high-priced tractor? Your competition is doing more with less, so think twice about purchasing new equipment. Don’t be tempted to spend on things you don’t really need. Spend time studying whether you can trim your asset base to generate cash and improve your solvency. Always incorporate potential tax implications into these decisions.
- Find and minimize expenses that are draining profits.
Just where your profits are going? A lot may be going into excessive family expenses. Farm families have raised their quality of living in the past decade, and rightfully so. But if not so long ago you lived on $70,000 a year, and now that number has increased to $270,000 annually, a closer look is needed. Paying for family members’ fuel, cell phone bills and other expenses can become expensive. These can drain the profits from your company. You may want to continue providing these benefits, but just know the true numbers of dispersing your profits. They’re almost always higher than you think.
Always remember, while it’s important to trim the fat, you also need to keep what is needed for growth and survival – the integrity and strength of your business depends upon the core people and structure that are key to your success.