A healthy source of positive cash flow should be the primary focus of any company’s endeavors, including farming. A good cash flow helps you cover your operational expenditures and the interest and principal payments on farm land loans and leads to profits and growth for your business.
One thing becomes quite obvious when you compare what is coming in (profit from selling the harvest or cattle) to what is going out (cost of seed and feed, insurance premiums, and lease payments). Regarding agriculture, having a solid cash flow requires more focus on the long game. Your balance statement will show some wild changes due to factors such as seasonality, the varying prices of commodities and expenses, and weather events. When you’re up against obstacles like these, it could be months or even years before you see a positive cash flow into your business.
When it comes to maintaining a healthy cash flow, there is no replacement for preparing and being familiar with your numbers. This is especially true when the next significant check won’t be coming in for several months. Use the following strategies and methods to ensure that you always have sufficient funds to operate your farm.
Create a stronghold of financial flow with your reserves
At the beginning of each new cycle, you should take some time to sit down and budget your cash-flow estimates. This should include what you anticipate will come in and what must be paid monthly. Because of this, you will have a better idea of which months are more likely to have a negative cash flow and when you can expect to start seeing positive cash flow again. After that, devise a strategy to build up your reserves and pay for your costs. Because running your credit lines up to their limits is the last thing you want to do. The next step is to schedule regular meetings with your bookkeeping software and spreadsheets to check that the metrics follow your strategy and formulate a course of action if they are not.
Spend less on administrative costs to improve long-term returns
When playing this lengthy game of working toward your goal of positive cash flow, your primary focus should be lowering your overhead costs while simultaneously increasing your gross margins (sales minus expenses). Utilities, insurance, and machinery fall under “overhead expenses,” which refers to costs incurred by your company but not directly related to the manufacturing of goods. Because most overhead expenses are constant and predictable, cutting them will significantly impact your cash flow throughout your company’s lifetime.
When appropriate, practice resource conservation and closely track usage. Finding strategies to reduce the amount of fertilizer, power, water, and gasoline used will result in cost savings.
Regarding your services, you should schedule some time out of your schedule once a year to go over your policies and contracts. You will want to check that your insurance plan does not include treatments and coverage you do not require. After that, look at your options or negotiate a better price with your current supplier.
Last but not least, depreciation might be a burden on your overhead costs. Do you have equipment that sits unused for longer periods than it is put to use? You should conduct a cost-benefit analysis to determine whether selling the item would be more beneficial and then lease it as needed.
Keep an open mind on a new agricultural venture
Finding innovative approaches to increase crop yields on farmland and in agricultural facilities is considered sound business practice by some farmers. Income diversification on a farm is not a silver bullet solution, but it can help you spread your risk and may even provide a source of cash when needed. Do you have access to a building that is not utilized but could be transformed into a venue for events? (Think about birthday parties or barn dances.) Have you ever considered growing “farm-fresh” products such as honey, fresh-cut flowers, veggies, or wine grapes on your farm? Or perhaps you have innovative plans to increase the revenue generated by your farm. Check out the List of Alternative Crops and Enterprises provided by the USDA for a few ideas to get you started.
Use your credit wisely
A significant number of farmers are dependent on short-term financing to make it through the lean months. A flexible option to cover payroll, make purchases of inputs and cover other company costs. At the same time, you wait for the checks to arrive can be provided by a reputable lender in the form of an agricultural line of credit. On the other hand, credit cards ought to be handled with extreme caution. Remember that using your credit card to its maximum limit can lower your credit score, affecting the interest rate you are charged for using the card. Although it is tempting to sign up for a credit card that does not charge interest, it is important to remember this fact.
A unique mix of long-term thinking without losing sight of the specifics is required to manage cash flow in agriculture. This is one of the most challenging aspects of farming. You’ll be able to get more done with the cash management services for agricultural businesses offered by Minnwest Bank. Streamline your accounting practices while simultaneously being linked to real-time data and processing payments quickly and securely using your mobile device. Make sure to get in touch with us today.
How can I prevent my cash flow from becoming stagnant and protect my agriculture business?
Negative cash flow will negatively influence your company, and the repercussions can be significant if they persist over a prolonged period.
In agriculture, concerns with long-term cash flow can include the following:
Efficiency
This can be determined by the company’s overall economic and physical production. To arrive at an accurate estimate, you will need to consider factors such as yield per acre or variable costs per unit of production. If your farm has a high cost of production, one possible explanation is that your operations could be more efficient.
Scale
When they are too huge to manage effectively, very large farms can risk experiencing problems. On the other side, farms that are too small may employ an excessive number of people, which means that the labor cost is not commensurate with the number of goods produced and sold.
Debt structural difficulties
There are a lot of companies out there that have debts, but there are methods to structure them that will increase your cash flow. You may, for instance, attempt to extend the length of your repayment period to pay back a smaller amount every month.
The best ways to keep a positive cash flow in agriculture are by monitoring expenses, maintaining inventory, and diversifying your products and services. By following these tips, you can ensure that your business is profitable and can weather any financial challenges that come your way.