I’ve said it before, and I’ll say it again, for any business, cash flow is king, and farms are no exception. The cyclical nature of agriculture, with income concentrated around harvest periods, and Fertiliser bills and tax payments in December/January, managing cash flow can be a difficult task. It is important to note that just because a business is profitable does not mean it will be able to generate cash well.
However, the implementation of some clever strategies can change the landscape and yield much better outcomes.
The first thing to do is ditch the guesswork and create a cash flow forecast. Map out anticipated income and expenses for the year, highlighting periods of potential tightness. This early warning system lets you proactively adjust spending or seek financing before a need arises.
Once this is done and you are aware of the peaks and troughs in income, the business can assess how to plug the funding gap within the troughs. One area is to work on building reserves during good seasons, prioritise building a financial buffer. This safety net can tide you over during leaner times, preventing the need for dipping into overdrafts which have become much more costly over the past few years.
Diversification has been a buzzword for a few years and there are plenty of options. This can either bring in a steady income all year round or can be a seasonal income to fit in with the planned troughs as mentioned above.
Every seed, fertiliser bag, and tractor payment matters. Tracking income and expenses is an important aspect of the finance function and using the correct software is paramount in helping the farm achieve its goals. Knowing where you are financially with regular check ins is important to keep abreast of the performance against budget.
Lean on suppliers
Suppliers can play a key role in helping farmers improve cash flow, many offer extended payment terms or delayed billing options, allowing payments to be deferred until after harvest when they have income from selling their crops. This can ease the immediate financial burden during planting and maintenance phases. Although, this can mean significantly higher costs all in one short period of time.
Some suppliers offer credit lines to established customers, enabling them to purchase necessary inputs even when short on cash. This can be helpful for unexpected expenses or temporary cash flow dips.
Purchasing inputs in bulk at discounted rates can significantly reduce overall costs and free up capital for other operational expenses. Building strong relationships with suppliers can even lead to negotiated discounts or early bird bonuses. In addition to this, bulk purchasing can help to build a strong relationship with the supplier and lead to favourable credit terms.
Adopting technology can offer a range of benefits that can significantly improve cash flow management.
Working with the right software is not only important for keeping track of the figures but can help streamline the whole financial management function. There are also a number of apps which can work as addons to the software, these can be specific to cashflow forecasting and use historic data to predict future trends.
Technology is constantly evolving and does not just improve the financial side of the business. Automation can assist in many areas of the farm, from GPS guided machinery and soil sensors to robotic milking systems and automated feeding systems.
Managing farm business cash flow requires discipline, foresight, and adaptation. Businesses of all sizes whether profitable or not should produce a comprehensive budget factoring in stress tests against interest rates and all inflationary raising costs.
By implementing these strategies, you can transform your farm into a thriving cash flow machine, leaving you free to focus on what you do best.