Managing cash flow on your farm

Why do I need to manage cash flow?

Managing cash flow means you have access to cash when you need it. On Canadian farms, knowing when your bills are due and making sure you have the cash on hand to pay them is a key pillar of good financial management.

Cash flow is an estimate of all cash receipts and expenses expected to occur during a certain time period. Estimates can be made monthly, bi-monthly, or quarterly and can include farm items as well as non-farm income and expenses.

Cash flow on the farm impacts everything from how you market your inventory to your relationship with your lending institution. For many producers, forecasting cash needs can still be challenging.

Knowing your cash flow on your farm can help you

• Decide when to make purchases, generate sales or cut overhead

• Focus on investing in new products, recruiting staff or expansion

• Create a loan repayment blueprint, maximizing your lender relationship

What’s the difference between short- and long-term cash flow planning?

Terry Betker with Backswath Management in Manitoba says over the short term, managing your cash flow just means making sure you have access to cash, either in your bank account or on your operating loan, when you need it. It’s different for long-term planning.

“Over the longer term, it involves managing the liquidity in your operation; understanding where the cash is coming from, where it’s going and making sure it’s being used for the right purpose. Purchasing equipment on an operating loan is a classic way to get into a tight cash flow scenario.”

How do I start cash flow planning?

Drawing up a cash flow budget is a good way to start. FCC has a month-by-month sample in their downloadable Cash Flow Planning Guide that lists initial cash on hand then tallies revenue from all sources and total monthly expenditures. The resulting itemized list highlights potential shortfalls well in advance so they don’t become critical.

A typical grain, oilseed and cash crop operation requires large amounts of cash in spring to cover the expenses of planting a crop. Mortgage or machinery payments can be scheduled for any month of the year and living expenses are constant.

Some producers have 100% liquidity: enough working capital in their bank accounts to cover a full year’s expenses. Most rely on operating loans to tide them over until they receive revenue from inventory sales.

Many people struggle the first time they attempt a cash flow plan that accurately forecasts their income and expenses, Betker says. However, most improve after they’ve done a few and gain a better understanding of their income and expense patterns.

You can try different scenarios to see how commodity price drop or an unexpected repair bill could affect cash needs. Ideally, you’ll determine you have access to enough capital so minor fluctuations don’t have an outsized impact on your operation.

“If you get to the point where your cash flow impacts your management decisions, forcing you to sell something you don’t want to, or prevents you from purchasing something you need, you’ve got a real problem,” Betker says. “The more liquidity your operation has, the more resilience it has when faced with adversity.”

From an AgriSuccess article by Lorne McClinton.

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