There’s no denying that maintaining positive cash flow is the goal of every business venture. However, having healthy cash flow can be challenging for farmers. There are multiple variables, such as seasonality, weather events and fluctuating income and expenses that impact the amount of cash coming in and going out during the year.
Taking a short-term approach to optimizing cash flow, like selling assets or equipment, won’t give you long-term success. Instead, implementing financial strategies, such as tracking your income and expenses, will help you be better prepared financially in the long run. Follow our six strategies to set yourself up for success.
1. Get Organized By Tracking Income and Expenses
Good financial management starts with organization. Creating a monthly budget is a positive first step that allows you to easily track your income and expenses throughout the year. Everything from crop yields to production expenses like fertilizer, fuel, insurance and rent add up. If you own livestock, you’ll want to include the projected livestock prices and feed when you go to market.
Tracking your numbers throughout the year will help you make timely, informed decisions. You’ll be able to better analyze trends in prices and monitor your profitability. Budgeting will also help you catch increasing expenses or diminishing profits faster so that you can take corrective action. Having your budget projections done before you buy your inputs for the next year allows you to be better prepared for the next season.
When putting together your budget, make sure the numbers are based on past performance. Once you have this information, it’s important to evaluate and ask yourself these questions:
- What was my break-even cost to raise my crops or livestock last year?
- How has the market performed over the past one to five years?
- How much are my equipment and rent payments?
- How much crop or livestock do I need to sell to make a profit?
2. Run Regular Cash Flow Reports
Running a cash flow report on a monthly or quarterly basis provides a real-time view of your financial health. This statement shows your cash inflows, minus outflows, to tell you how much you have on hand to operate your farm. If you have less cash than you need, you can look at where your money is going and decide whether to cut costs or adjust your pricing to increase your margin. Most accounting software products, including Quicken® and QuickBooks®, allow you to input your financial data and generate a cash flow statement. You can also access FinBin, one of the largest and most accessible sources of farm financial and production benchmark information in the world, to get detailed reports on whole farm, crop and livestock financials.
3. Lease Equipment
Instead of buying, you can lessen your short-term financial burden by leasing equipment. You won’t need to upgrade or sell outdated equipment, and equipment leases often qualify for tax credits. Some banks offer leasing programs with financing options up to 100%, which can allow you to maintain a more regular cash flow.
4. Be Open to a New Farm Enterprise
Finding new ways to make land and facilities more productive is a business strategy that positively impacts your cash flow. Diversifying your farm income can spread your financial risk and provide your business with multiple streams of revenue. For instance, if you own crops you may consider expanding your operation by selling hay bales, plowing or putting in drain tiles. If you own livestock, cattle processing or marketing meat products may be an option. However, it comes down to how many hours you have in the day, whether you have enough help on your farm, and how much you know about the enterprise. You’ll want to make sure it complements your full-time farming operation rather than taking your time away from planting, harvesting or caring for livestock.
5. Open a Business Checking Account
Keeping business finances separate from personal finances can be tricky when you run a farming operation. However, a business checking account simplifies your accounting and farm management. By collecting receipts in your business account and writing checks for expenses, you won’t mix your home and farm finances. Having a business checking account also allows business partners or trusted employees to access the account to pay bills or collect payments.
6. Explore Financing Options
A line of credit can provide quick access to funds when you need to bridge gaps between payables and receivables. With this financing option, you can borrow funds and only pay interest on the outstanding balance. Then when grain or livestock are sold, those funds can be applied to the line of credit and the balance becomes available again when needed.
Refinancing can also be a good choice if the interest rates have dropped. However, make sure you have significant equity built up in either your land or machinery if you do refinance.
In addition, there are plenty of agricultural loans available, such as farm equipment loans, operating capital loans and Beginning Farmer Loans. There are also Farm Service Agency (FSA) Loan Programs to help you buy farmland or finance agricultural production. Your Ag Banker can offer advice on what type of loan will benefit your farming operation, review your cash flow statements, and discuss loan options if you need assistance.
Maintaining a positive cash flow is possible on your farm by implementing cash flow management strategies. Reach out to one of our Ag Bankers today to see how they can help you reach long-term financial success.
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