12 Jul 2023
Cash flow is the road map of what your money will be doing throughout the year. Creating an annual cash flow projection is accomplished by identifying and understanding when cash is coming in and when cash is going out. A positive cash flow will not only cover your operating expenses and service your debt but will lead to profits and growth.
When creating your annual cash flow, include projections for cash inflows and outflows for both farm and non-farm activities. Combining farm business and personal finances brings all expenses to the forefront, creating an opportunity for important budgeting conversations.
Examples of inflows and outflows are:
Inflows:
- Crop sales from projected production, including estimated yields and projected price adjusted for local basis
- Livestock sales
- Recurring agricultural program payments such as the Conservation Reserve Program (CRP)
- Other income from custom work, service, or cash rent received
- Off-farm income
Outflows:
- Operating costs: seed, chemical, fertilizer, fuel, feed, drying, storage, custom hire, payroll, veterinary costs, machinery rental, etc.
- Fixed payments including cash rent, equipment lease, and insurance premiums
- Principal and interest debt service payments
- Planned capital expenditures
- Taxes, family living, and other off-farm expenses
When will your operating expenses and payment obligations need to be paid for?
After identifying your income and expenses for your production cycle, the timing of these transactions is pertinent to your cash flow projection. It is important to align your payments and expenses with the timing of your income; this is typically late fall and early winter for crop farmers and late winter or early spring for livestock producers. Knowing your month-by-month cash flow builds a base to form your marketing plan around and serves as a road map to follow.
After you have formed a solid cash flow projection, it is important to use it as an ongoing tool. As you move through your production cycle you may identify fluctuations in your inflows resulting from yield changes, weather events, or ever-changing commodity markets. Adjusting income expectations to manage those fluctuations will help work through the potential impacts to your operation.
In your month-by-month cash flow, there may be lean months, and when those months are identified ahead of time you will be able to build reserves or build a plan to cover that period of time. A line of credit can give you a flexible option to cover expenses while you are waiting for income to return to the farm. A revolving operating line of credit is intended to be a management tool used to assist cash flow during a production cycle.
In your month-by-month cash flow, there may be lean months, and when those months are identified ahead of time you will be able to build reserves or build a plan to cover that period of time. A line of credit can give you a flexible option to cover expenses while you are waiting for income to return to the farm. A revolving operating line of credit is intended to be a management tool used to assist cash flow during a production cycle.
Managing cash flow in agriculture requires a balance of long-term thinking without losing sight of the details. The cost your cash flow needs to generate is one of those details. Using a line of credit to manage cash flow generates a high-interest expense. Paying down your operating line when cash becomes available is important to keep that expense in check. Another way to keep operating interest down is by offsetting that expense with an interest-bearing account.
In today’s farming world, cash on hand is the key to success. This is why understanding and forecasting cash flow is imperative. Maximizing an understanding of when inflows and outflows are occurring can help alleviate stress during certain parts of the production cycle. By taking on a line of credit and juggling interest-bearing accounts, farmers will have an optimal strategy for weathering any storm that life throws their way.
In addition to using cash flow projections as an ongoing tool, it’s just as important to reach out for support if you need help with your financial journey. AgCountry understands the various streams of income and expenses that farmers have. If you need additional assistance with creating a cash flow projection, please contact your local AgCountry office, who will be happy to meet with you.
