From Cash Flow Basics: Don’t Stress, Plan by Paul Dietmann
“Tight cash flow can be challenging, even for the most experienced grower. For a beginning farmer, however, a cash flow crunch can quickly become a disaster. An annual cash flow projection is a very useful tool for a farm. You plot out on a month-by-month basis when cash income will be received and when cash expenses will need to be paid. The projection will help you anticipate in which months your cash inflow will not meet your needs. Most importantly, you will be able to plan ahead to cover cash shortfalls without tapping credit cards, leaving bills unpaid, and possibly wrecking your credit score.
If you develop a cash flow projection and predict that cash flow is going to be short in some months, you have several options to cover the shortage. Maybe you can build up your cash reserves during good months. Maybe you could change your farm enterprises and add one that brings in cash flow during months you would otherwise fall short. Perhaps you could pick up some off-farm work at key times of the year. You might be able to re-schedule the payments of some bills or loan payments to more closely match your cash flow. Or, you could set up a line of credit with a lending institution, which can be tapped in lean months and paid off in good months.
Analyzing Cash Flow
Breaking out the farm’s cash flow will tell you if the farm operation paid its own way or was subsidized by other sources of cash such as off-farm income, proceeds from new loans, or with sales of capital assets such as equipment or breeding livestock. To analyze cash flow, break it out into three distinct categories:
1. Cash flow from operations: Cash flow from operations includes all of the dollars that flow in and out of the farm in normal, day-to-day activities.
2. Cash flow from investing activities: Cash flow from investing activities refers to capital investments in the farm, not the dividends you received from investments in mutual funds.
3) Cash flow from financing activities: Cash flow from financing activities considers funds provided by lenders as well as funds made available by the farm owner.
The farm operation should generate enough positive cash flow from operations to pay all of its operating expenses and have enough cash left to replace some capital equipment, make loan payments, and pay the farm owner something back for his or her investment in the farm. If cash flow is coming up short, a more detailed cash flow analysis is in order. Ultimately, positive cash flow is what will keep you farming for years to come.”
From Cash Flow Basics: Don’t Stress, Plan by Paul Dietmann
