Last month we talked about strategies to improve cash flow. The first step is to develop a cash flow projection, preferably by month. So what does that look like and how do we do it?
The first step is to build a table—use Microsoft Excel or work with your consultant—that lists your expenses by month. As you build out your list by month you will note that some expenses will have flexible timing and some will have fixed dates (See Example below).
This exercise shows your cash deficits and alerts you to take action accordingly. Obviously, we need to have some options for moving some things around in your cash flow projection. In this example, it probably makes sense to incrementally forward contract corn and wheat, and make incremental purchases of fertilizer. This will make give you a more manageable cash flow situation.
It is important to build a cash flow so you can see all your options. Make sure you look at the timing of your term debt payments and also seasonal family living needs. Remember to evaluate when you can leverage vendor financing and stretch out the terms on your expenses.
Next, work on your plans for revenue. By mapping revenue in your cash flow projects, you can segment your marketing decisions to the most basic level, measure potential outcomes and choose the best management strategy.
List each crop separately as each commodity will often have different timing and market considerations, prompting different decisions that need to be made. When looking at the timing of your revenue, compare your options such as which crops are you paying storage on and make sure you take account for margin calls and forward contracts.
Also, don’t get caught up in historical market trends and make general assumptions based on those. Wheat typically experiences a post-harvest rally. Cull cow prices may typically be at a low in November when the market is saturated and generally a high in May. Don’t depend on things to work the same each year and don’t market for price alone.
Instead, evaluate storage and other marketing costs, feed costs, weather and other factors. Remember time is money. In the case of cows, sales that occur earlier can reduce interest, decrease shrink and also eliminate possible death loss. In the case of wheat, it might make sense to spread out sales more than in others. There are also tax implications to consider.
With a cash flow statement or projection like this one, it is 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.
As always, whether you own your own farm or you are a farm manager, I recommend working with someone who can help you run a number of scenarios in a cash flow projection based on various timing, weather, price and cost scenarios.