How Agriculture Businesses Can Manage Cash Flow
Cash flow ebbs and flows for most businesses, but agriculture businesses know this all too well as they deal with the impact of the changing seasons, crop failure, and other unique issues of farm life. Here are some considerations to help agriculture businesses manage cash flow.
Build a Cash Reserve
One of the best things you can do to manage cash flow is to build a growing cash reserve over time. This way, you can have peace of mind knowing that when cash flow woes occur, you'll be able to cover expenses until the situation rebounds. Set up a business savings account that you can draw on for this purpose.
Forecast Cash Flow
You'll need to regularly monitor and forecast cash flow. This will help you identify patterns and predict future cash flow situations.
"To be effective, farmers should regularly update their cash flow statements," says Penn State Extension1. "What does 'regularly' mean? The answer to this question varies based on whether you have a very seasonal operation (such as selling Christmas trees) or a business that receives cash throughout the year (such as a dairy farm). It is recommended that new financial managers begin with a cash flow statement that has monthly intervals. Although there is a bit of work keeping the statement current, having monthly statements provides an early warning of cash deficits or surpluses. By using the cash flow statement and the cash flow budget the farmer can make well informed management decisions such as when to purchase new equipment, or when to open a line of credit to cover cash deficit periods."
Sell off what you're storing and assets that aren't producing
If you have crops and livestock that aren't currently on the market, consider selling them off to get a quick cash flow boost. While this clearly won't work as a long-term, ongoing strategy, it can help in a pinch. Just don't let your inventory remain too low for too long, as this can become a bigger problem.
You can also sell off any assets you have that are underperforming. Economist William Edwards suggests2 comparing reduced costs and lost income to identify assets that will have the least negative impact on total profits.
Stop making major purchases
At the same time, you may need to put a hold on making any major purchases. If you need new equipment, consider refurbished options or sharing with someone else. Edwards recommends owning machinery jointly with another producer or trading equipment use and labor. You can also look at leasing equipment rather than owning it, which can ease the burden on your cash flow.
Take Out a Loan
Try applying for a business loan to give you another source of money to draw from when cash flow isn't where it needs to be.
Cash flow can become a major problem in the agriculture business, but there are options to consider before things become dire. Do what you can to prepare and be versatile when you need to keep cash flow issues from killing your business.