Positive cash flow is the life blood and ultimate goal of every business venture, farming included. Not only does cash flow help cover your operating expenses and service your debt, but positive cash flow leads to profits and growth.
As you examine what’s coming in (selling the harvest or livestock) and what’s going out (seed and feed, insurance, leases), one thing becomes pretty clear. In agriculture, achieving positive cash flow takes more of a long-game mindset. Seasonality, fluctuating commodities and expenses, weather events ... your balance sheet will show some wild fluctuations. When you’re working with these challenges, months or even years can pass before you achieve positive cash flow.
When it comes to maintaining a healthy cash flow, there’s no substitute for planning and knowing your numbers, especially when the next big check isn’t coming in for several months. Use the following strategies and tactics to move the needle, so you always have enough capital to run your farm.
Build a cash-flow fortress with reserves
At the start of every cycle, sit down and budget your cash-flow projections — what you expect to come in and what needs to be paid, month by month. This can help you see ahead of time which months are likely to see a negative cash flow, and when the money will be coming back in. Then, come up with a plan to build reserves and cover expenses. Because the last thing you want to do is max out your credit lines. Then, make regular appointments with your spreadsheets and bookkeeping software so you can make sure the metrics line up with your plan, so you can respond if they don't.
Reduce overhead for long-term results
In this long game of working toward your goal of positive cash flow, your focus is on reducing overhead while improving gross margins (sales minus expenses). When it comes to overhead, these are expenses that are essential to your business, but not linked to production — things like utilities, insurance and machinery. Most overhead expenses are static and predictable, so by reducing these, you’ll accomplish a lot of good for your cash flow in the long run.
- When applicable, conserve and monitor usage. If you find ways to use less fertilizer, electricity, water and fuel, you’ll pay less.
- When it comes to services, set aside time once a year to review your policies and contracts. You’ll want to make sure you’re not paying for coverage and services you don’t need. Then, shop around or negotiate a better rate from your provider.
- Finally, depreciation can take its toll on your overhead. Do you have machinery that spends more time in storage than in use? Conduct a cost-benefit analysis, so you can evaluate whether you’re better off selling and then leasing the item as needed.
Be open to a new farm enterprise
For some farmers, finding new ways to make land and facilities more productive is good business sense. Diversifying your farm income isn’t a magic bullet solution, but it can spread your risk and perhaps even bring in a source of cash when it's needed. Do you have an unused facility that can be converted into an event space? (Think weddings or barn dances.) Ever think of cultivating “farm-fresh” products like honey, fresh-cut flowers, produce or wine grapes? Or maybe you have your own big ideas to earn more income on your farm. For a few to get you started, check out the USDA’s List of Alternative Crops and Enterprises.
Be credit smart
Many farmers rely on short-term credit to get through the lean months. An ag line of credit from a reputable lender can give you a flexible option to cover payroll, purchase inputs and cover other business costs while you’re waiting for the checks to arrive. Credit cards, on the other hand, should be used with care. While it’s tempting to sign up for a zero-interest credit card offer, keep in mind that maxing out your credit limit can lower your credit score, and that, in turn, can influence your interest rate.
Managing cash flow in agriculture requires a unique balance of long-term thinking without losing sight of the details. With Minnwest Bank’s cash management services for agri-business, you can get more done. Process payments quickly and securely with your mobile device, stay connected with real-time data and streamline your accounting. Contact us today.