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Cash Flow is Critical

Updated March 23, 2020
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Jack Davis

SDSU Extension Crops Business Management Field Specialist

Additional Authors: Heather Gessner

2020 vision for the farm business has become cloudy as we have moved into the first quarter of the year. Strong business management skills and systems do not go out of style in times of uncertainty. These skills will help the business work through this downturn in commodity prices.

Cash flow budget accuracy is critical in developing and controlling the business. A four-year study of borrower’s on average over estimated revenues by 15% and underestimated expenses by 17% resulting in a 300% error in net cash flow. In order to increase this accuracy, businesses need to regularly monitor cash flow and use it to control cost and set selling targets.

A strong practice is to keep a rolling 18-month cash flow and use this to control and adjust operations as needed. One method is to do this by quarter. Quarterly compare budget to actual, using the variances to make adjustments in forecasting and/or controlling of expenses, buying opportunities, selling targets, and then adding on the new quarter to keep the 18-month cash flow in place. This may have to be done monthly under increased uncertainty and as situations or information changes.

Spend the management time on planning, monitoring, and analyzing performance. Best practices for planning include what if scenarios, sensitivity analysis, and contingency planning. Don’t limit to best/worst or most likely add what could happen good and bad and what to do if it happens. Use current outlook, knowledge, experience, historical records, and best judgement. Avoid irrational fear and exuberance. Use a short- and long-term view along with evaluating and using risk mitigation. 

Best practices for monitoring and analysis include regular monitoring between projected and actual cash flow line items. Do this monitoring quarterly, monthly, or more often if needed. This practice helps identify major areas of risk and recognize prejudices. Businesses will be better able to take advantage of opportunities, alter future plans, and correct issues or problems as they arise. Recognize that a key difference between the top 25% and 10% is related to timing. Knowing when to expand or cut back, reallocate, and buy or sell. Assumptions need to be developed for every item in the cash flow plan as this allows for managers to drill down to causes. Monitor changes in internal and external environments which may lead to adjusting future expectations and adjusting the plan accordingly.

Analysis includes holding a quarterly or systematic debriefing on results of key decisions. Analyzing what went well and or poorly. Determine why it turned out as it did, what was good/bad, what could/should have been different, any adjustments required, risk mitigation needs, and leading indicators. The debriefing helps create team communication and aids in successor development. It is important to keep notes, written minutes, action plans, assigned responsibilities and timetables.

Keep in mind during these volatile times that strong business management skills are in style and will help you work through this. Below is a checklist of items to do.

Business Management Checklist

  • Know your numbers.
    • Understand what is making you money and what is not. 
    • Compare your financial ratios and expenses.
  • Price risk protection. 
    • Market on your margins, locking in profits when available.
  • Adapt conservation practices. 
    • Check on conservation programs through NRCS.
  • Reduce direct costs.
    • Spend management time on top direct costs fertilizer and seed costs.
    • Lower Input Costs w/o cutting Yield.
    • Work to Lower top 4-5 by 5 to 10%.
  • Cash rent.
    • It may not be prudent to continue sustaining losses on high cash rent farms.
  • Capital purchases. 
    • Invest in operational efficiency and excellence.
    • May need to reduce capital purchases.
  • Non-farm cash flows.
    • Manage time resourcefully.

Reference:

Cause of Farm & Ranch Failure, Danny Klienfelter, AgEcon TAMU

Related Terms

Farm Business Management