Farmers are often cash poor. Having enough money to purchase needed inputs when they are needed, or to pay monthly expenses, can be concerning, no matter what type of farming operation you have. Even a profitable farm can fall short on cash flow, particularly when unanticipated expenses occur. How often have you been short on cash, awaiting the harvest to get that positive cash flow moving again?
“Liquidity is the possession of cash, and sufficient assets that can be converted to cash, to pay the bills in the next 12 months,” Miguel Saviroff, Penn State Extension Educator, Ag Entrepreneurship and Economics, said. “A profitable farm may have liquid assets tied up in inventories when unexpected expenses occur.”
While it probably isn’t a good idea to sell the tractor or any other vital piece of property or equipment to turn an asset into needed cash, some farms may have inventory – hay, value-added products, or excess livestock – that can be liquidated should a cash shortfall occur, without damaging the farm’s overall profitability. But for most, some type of credit line is typically the tool utilized to get through those cash-strapped periods.
“A short-term loan or a line of credit is a convenient tool to have at hand,” Saviroff said. “A revolving line of credit can be a permanent solution for this situation.”
If the cash from your main crops isn’t lasting until the next harvest season, a line of credit allows the flexibility to access cash for the short-term. By accessing the line of credit only when needed, and paying it back as quickly as possible, the line of credit can get the farm through any deficit that occurs seasonally, or which results from unexpected turns of events.
One of the most useful tools to assist producers in assessing their cash flow needs and overall financial health is cash flow budgeting. When working capital isn’t sufficient to cover liabilities, a cash flow budget will show where the deficits occur, allowing adjustments to be made, or tools – such as that line of credit – to be put into place. And if you are lucky enough to have excess cash in some periods, learning to utilize it wisely can improve future cash flow, perhaps eliminating deficits.
“The cash flow is the most useful financial statement because it represents the best summary of cash operations in the farm. A cash deficit may require adjusting your plan. You may see then the answer to how much to borrow or how much debt to pay,” Saviroff said.
Adjusting and managing outflows to better coincide with inflows can solve a liquidity problem on a profitable farm. If your cash flow budget shows an excess of cash each July, for example, but a deficit typically occurs in April, examining expenditures versus income throughout the rest of the year can lend insight on how best to face that spring cash slump. Instead of purchasing a year’s worth of inputs using cash in the winter months, a better plan may be to purchase only six months’ worth. In this manner, the second six months’ purchase can be paid with that July cash influx, rather than coming up short in cash each spring.
“Most cash outflows occur at planting and most cash inflows come in at harvesting,” Saviroff said.
With that in mind, some farmers opt to add an additional crop or type of business to enhance cash flow during primary lag times. An orchard may add annual flowering plant sales for an early season influx of cash. Another farmer may decide to add a Community Supported Agriculture (CSA) component to his farm, so that CSA members pay for their season’s shares upfront. In these arrangements, the farmer has some “off season” cash income to put toward expenses, rather than having to wait to harvest. Hosting field trips for school children, or adding vegetables to a livestock farm, can add seasonal cash to the coffers and enhance overall cash flow during otherwise cash-slow times of the year.
Adding liquidity can mean offering an additional farm service, such as a farm stay, farm tours, or a value-added product that can generate year-round income. Adding a product that is able to be sold or offered year-round not only adds an additional income stream during cash poor periods, but can help keep cash flowing throughout all seasons.
A livestock farm, for example, could compost manure and bag it for retail sales. A dairy could open a retail store, selling their own beef or perhaps making cheeses, bringing retail customers onto the farm. A maple sugaring operation, bringing in late winter income and attracting customers, also adds an additional shelf-stable sales product to an otherwise seasonal farm.
Before embarking on a new farm venture, “know all your operating costs and make sure you will obtain a high gross operating profit,” Saviroff advised.
While supplementary farm income can create a positive cash flow at a time when the farm typically has a deficit, it’s important that the enterprise not be a drain on overall finances. Adding a brand new enterprise might not make sense, yet tweaking an existing one to add another income stream just might.
The fact sheet, “Assessing and Improving Your Farm Cash Flow,” by the Maryland Cooperative Extension, advises:
“Perhaps another crop rotation or livestock enterprise would increase cash flow and allow you to maintain profitability at the same time. For example, introducing legume hay into a rotation may bring in some needed cash during the summer months. You can maintain profitability through lower nitrogen fertilizer costs for subsequent crops.”
Adding liquidity can also be achieved by reducing expenses, including living expenses; changing marketing outlets; better managing inputs; managing credit reserves; liquidating assets; and taking on a part-time job. Depending on your exact situation, one or more of these methods can help to alleviate cash flow concerns.
When evaluating your farm’s cash flow, and determining how best to manage any concerns, keep overall profitability in mind. Long-term, increasing your farm’s profitability will positively impact your liquidity. But increasing liquidity without factoring in long-term profitability – or lack thereof – can mean long-term financial uncertainty.
Cover photo: abadonian/istock