Why Cash Flow is Key

Cash flow is crucial to successful businesses and is often called the king of financial management. If you’re struggling to make loan payments; have to sell grain or livestock every time you have a bill to pay; or have longstanding operating loan balances, you most likely don’t have enough cash flow to successfully run your business.

Balancing cash flow

Cash flow is the balance between business income and expenses over a specific period (ex: quarterly, annually) and you need some accessible cash to keep your business running. A cash flow statement can help you plan the movement of your cash for your next financial business period. The cash flow statement outlines all expected cash sources and expenses (including operating, financing and investing activities) and projects the likelihood of adequate cash being available to run the business for the next period. 
Poor cash flow can mean late or missed loan payments, overdue bills and increased operating debt. One way to ensure adequate cash flow is to set up a line of credit with your bank or financial institution. It gives you cash to cover expenses when your income is delayed and bills have to be paid. However, you have to pay the whole line of credit off, at least once a year, or it will become impossible to pay off in the long term. 

Calculate income and expenses 

A business receives cash as income and spends it on expenses.  Sources for cash in a business:
• sale of farm products and services
• sale of capital assets
• loan advances from lenders
• personal contributions
There are also many forms of expenses:
• operating costs
• loan and interest payments
• capital asset buys
• salaries/personal draws
• taxes

Calculate a basic cash summary

A basic cash summary notes the beginning cash balance at the start of a financial period.  It adds income from operating, sales, loans and personal contributions. It subtracts operating expenses, capital asset buys, loan and interest payments and personal withdrawals to get the ending cash balance. 
Beginning Cash Balance                Add: Operating income
                                                                    Cash from capital sales
                                                                    Loan advances
                                                                    Personal contributions
                                                    Equals: Total Cash Inflow
                                                   Subtract: Operating expenses
                                                                    Capital asset buys
                                                                    Loan payments (interest if applicable for the time period)
                                                                    Personal withdrawals
                                                   Equals:  Ending cash balance

How to improve cash flow

Improving cash flow means increasing income and lowering expenses. Making income match or exceed expenses means you don’t have to go looking for outside loans of cash. There are five ways to improve cash flow for your farm business:
  1.  Increase income by increasing yield or quality, farm size or scale (ex: add acres or livestock), or finding new income sources (ex: custom work, new enterprises, off-farm jobs). Sell non-productive assets (ex: unneeded machinery) to add to your cash flow.
  2. Cut expenses for things like feed and livestock operations by taking advantage of seasonal discounts, extending grazing techniques or ration balancing. Try to maximize advance payment programs by getting a cash advance at a lower interest rate on operating credit.  Ask lenders to re-evaluate an operating line of credit might to give you a lower interest rate. If possible, you may save money by reducing your inventory to the essentials or just-in-time delivery.
  3. Lower personal draws from the business to cover non-farm expenses and personal costs. It may help to set a base salary for yourself and put it in a separate bank account; then stick to the salary for personal and living expenses.
  4. Lower the amount of principal owed on loans by paying them down as quickly as possible. You can make payments on principal loan balances during high income years, taking pre-payment penalties into account.
  5. Re-evaluate your debt load and see if there’s a better way to finance your operations. You may gain cash by getting a consolidation loan at a lower interest rate and extend the repayment period to free up some cash for current operations. Also, some term loans can be refinanced over longer time periods, but avoid refinancing with higher interest loans.
Farms that have create healthy balance sheets and income statements can still struggle with cash flow. Well-managed farm operations use several approaches to keep a healthy cash flow for their operations. FarmPlan is a software tool provided by Manitoba Agriculture that can help you project cash flow for your operation. 

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