Cash Flow Basics: Don’t Stress, Plan

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For some farmers, managing cash flow means paying the bills until the checking account is empty, running the credit cards to their limits, and then hoping the mailman delivers a check or two. instead of just more bills.

Tight cash flow can be difficult for even the most experienced grower. For a beginning farmer, however, a cash flow crisis can quickly turn into a disaster. Bills go unpaid, credit cards are depleted, the credit rating begins to drop, and within months the farmer can go out of business.

If managing your farm’s cash flow from the bottom of your pants is stressing you out, cash flow planning and analysis will help ease your anxiety.

Cash flow projection

An annual cash flow projection is a very useful tool for a farming operation. You calculate month by month when cash income will be received and when cash expenses need to be paid. Projecting will help you anticipate months when your cash flow will not meet your needs. Most importantly, you’ll be able to plan ahead to cover cash flow shortages without using credit cards, leaving bills unpaid, and possibly ruining your credit score.

A cash flow projection is a forecast of all the money that is likely to flow in and out of the farm in a given time period. Cash flow planning begins with a month-by-month projection of the cash flows you expect to see in the coming year. The screening can start on January 1 and follow the calendar year. Or, it can start when something big is expected to happen that will impact the cash flow of the farm, like buying land, constructing a new building. or the payment of new debts.

Paul Dietmann

Many producers use a simple spreadsheet or journal to document the money coming in and going out of the farm. Cash receipts include income generated from the sale of agricultural products, payments from government programs, sales of machinery and livestock, income from off-farm employment, and proceeds from new loans. Cash outflows include operating expenses, principal and interest payments on loans, funds used for capital purchases, income tax and social security payments, and levies for family life carried out by the owner of the farm.

Almost all farms will have months, if not years, of negative cash flow from operations. Often the farm cash flow is low in summer. Bills for seeds and other farm inputs have been paid, there may be bills for machine repairs, and there isn’t much to sell until the end of the year.

What about a shortfall?

If you develop a cash flow projection and expect the cash flow to be short in a few months, you have several options to cover the shortage. Maybe you can build up your cash reserves in good months. Maybe you could change your farming businesses and add one that generates cash flow for months you wouldn’t have been successful otherwise.

Perhaps you could find work off the farm at key times of the year. You may be able to reschedule certain bill payments or loan repayments to better match your cash flow. Or, you can set up a line of credit with a lending institution, which can be used during the lean months and paid off during the good months.

It is terribly tempting to get through a few cash tight months using the most convenient source of short term credit: credit cards. With their high interest rates, credit cards are the worst way to cover cash shortages, unless you diligently pay them off to zero every month. If you decide to use short-term credit to fill your cash-poor months, work with a reputable lender and apply for a farm loan or line of credit. The terms will be much better than paying credit card interest rates of 18% or more.

It is terribly tempting to get through a few cash tight months using the most convenient source of short term credit: credit cards.

In the long run, the farm should generate enough positive cash flow to pay all of its operating expenses, make loan repayments, pay the farm owner a decent drawdown, and have enough cash to replace some. capital goods and put some in cash reserves.

If the operation consistently generates negative cash flow, you should undertake a more in-depth financial analysis and consider making structural changes to your farming business. This type of analysis is carried out at the end of the year and looks back on the actual cash inflows and outflows.

Analyze cash flow

The farm cash flow breakdown will tell you if the farm has paid its own costs or has been subsidized by other sources of cash such as off-farm income, new loan proceeds, or the sale of capital assets. such as breeding equipment or livestock. To analyze cash flows, divide them into three distinct categories:

1. Operating cash flow: Cash flow from operations includes all dollars that flow in and out of the farm as part of normal day-to-day activities. The money comes from the sales of milk, cattle, grains, vegetables and other products. Money can also come from government payments and custom work. The money comes out when you pay for seeds, feed, fertilizer, fuel, and other operating expenses. We want cash flow from operations to be positive every year.

2. Cash flow from investing activities: Cash flow from investing activities refers to the capital investments in the farm, not the dividends you received from the mutual fund investments. The cash flow in this category usually comes from the sale of machinery, livestock or land. Cash flows are used to pay for purchases of these capital investments.

Cash flows from investing activities, whether positive or negative, can offer clues to other aspects of farm management. For some farms, cash flow from investing activities can be positive because the farm does a great job with heifer calves and always has a surplus of breeding stock to sell. For others, it could be positive because machines are sold to cover operating cash flow shortages and nothing new is purchased. Cash flow from investing activities can be negative because the farm uses positive cash flow from operations to make capital improvements, which is good.

3) Cash flow from financing activities: Cash flow from financing activities takes into account funds provided by lenders as well as funds made available by the farm owner. The cash flow comes from new loans and off-farm income. Off-farm income is included because it is money that could be used by the farm if needed. Cash flows are used to pay principal and interest on loans and for cash withdrawals by the farm owner.

It is useful to look for trends in cash flows from fundraising activities. Are loan repayments made on time? Are principal balances repaid faster than new loans are taken out? If the operation has an operating credit, is the balance refunded or is only the interest paid? Is the owner able to regularly withdraw money from the farm or is he putting more money into the farm?

The farm is expected to generate enough positive cash flow to pay all of its operating expenses and have enough cash to replace some capital equipment, make loan repayments, and repay the farm owner for his investment in the farm. closed. If cash flow is insufficient, a more detailed cash flow analysis is required. Ultimately, a positive cash flow is what will keep you growing for years to come.

Dietmann is a Senior Loan Officer at Compeer Financial



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