Cash Flow Management: COVID and Survival

University of Nebraska – Lincoln Author

09/01/2020 Added

11 Plays

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Robert Tigner looks at the implications on cash management under pressure from low crop prices and COVID
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[00:00:10.090]Cash flow management in the era of COVID.
[00:00:12.880]We have a challenge this year that was really unexpected.
[00:00:16.800]And here are some suggestions about how to manage cash
[00:00:20.890]on your farm or ranch for the coming year.
[00:00:24.220]So a cash flow budgets are a critical part
[00:00:26.350]of financial management, they can be used to
[00:00:29.600]both plan for cash flow and attract cash flow in year.
[00:00:35.210]This is a typical format of a cash flow plan.
[00:00:38.980]This one, as you see, has a column
[00:00:41.920]that uses last year as a form for the following year.
[00:00:48.610]This one is set up as four quarters,
[00:00:52.486]we can do these as an annual cash flow
[00:00:55.120]or as a monthly cash flow.
[00:00:59.130]For those people that have sales of commodities
[00:01:04.280]that occur on a monthly basis,
[00:01:07.280]I would suggest a monthly cash flow.
[00:01:09.470]Those that have a commodity that sell
[00:01:13.910]once a year or twice a year
[00:01:16.600]then quarters is probably a good choice for cash flow.
[00:01:22.760]And speaking of templates, here's a large number of sources
[00:01:26.990]for cash flow budgeting templates
[00:01:28.740]that you can easily access.
[00:01:31.480]We have them from Iowa State University,
[00:01:35.650]Kansas State, Montana, and from Michigan State University
[00:01:41.330]that are available and easily used.
[00:01:45.360]So how do I set up a cash flow?
[00:01:47.480]Well, last year's is a good guide,
[00:01:51.220]especially when there's a little change
[00:01:52.970]that's going to be expected.
[00:01:55.090]And when those changes that you do make
[00:01:57.630]for that coming year, you just make those minor changes
[00:02:00.850]where additional cost of fuel or fertilizer
[00:02:08.460]or changes in grain prices.
[00:02:13.620]Make those adjustments, a slight adjustments.
[00:02:17.600]But you need to have enterprise budgets to build a cash flow
[00:02:22.460]when there's going to be significant change.
[00:02:25.330]By that I mean, am I going to have a new enterprise?
[00:02:28.540]Or am I going to downsize or upsize,
[00:02:31.160]upscale up something?
[00:02:33.370]Those budget enterprises are important
[00:02:36.050]to add to that new cash flow budget
[00:02:39.760]that you're going to prepare.
[00:02:41.770]Here's a look at how cash flow budget would look like,
[00:02:45.390]if I'm preparing that from one year to the next
[00:02:49.013]because I have made significant changes.
[00:02:53.250]I want to find out if this change is going to influence
[00:02:57.460]my cash flow from one year to the next.
[00:03:00.080]And whether or not is going to be a positive or a negative.
[00:03:04.190]Down at the bottom, next to bottom line net cash flow
[00:03:09.570]you see is net negative for the first two years.
[00:03:12.990]Now I know that I need to make a little extra borrowing
[00:03:16.500]for those first two years.
[00:03:18.251]But after year three, four, and five,
[00:03:21.510]I'll be able to pay that borrowing off
[00:03:23.970]assuming everything works.
[00:03:26.190]Just because I've made a cash flow budget
[00:03:29.090]doesn't mean that everything's going to work.
[00:03:31.630]My assumptions need to be pretty accurate,
[00:03:34.830]or my assumptions need to be conservative to make that work.
[00:03:39.430]So how do I stretch cash flow?
[00:03:41.970]One of those ways is to renegotiate leases.
[00:03:45.280]Very soon we're going to be renegotiating for 2021 leases,
[00:03:50.100]and that conversation should take place with your land owner
[00:03:55.780]about whether or not this particular piece of ground
[00:03:59.840]is right priced for its rent.
[00:04:05.300]Then review upcoming expenses like fungicide, fertigation.
[00:04:09.584]And certainly each irrigation pass,
[00:04:13.000]does that irrigation pass cost more
[00:04:16.950]than the additional yield that you expect to gain from it,
[00:04:20.780]that's a bad trade off,
[00:04:22.790]more cost and lower yield income from it.
[00:04:28.800]So if I can't cash flow as positively as I want
[00:04:32.760]or if it's negative, we may need to use financial reserves,
[00:04:36.990]you may need to sell current assets.
[00:04:39.704]And you may need to use your credit reserves as well
[00:04:44.070]to get through this time period.
[00:04:46.760]Refinancing debt makes sense also,
[00:04:50.240]especially if that debt does not match the length of time
[00:04:55.530]that asset is going to be present on your farm.
[00:04:59.490]By that, I mean, do you have three year financing on
[00:05:03.220]machinery that's actually going to stick around for five,
[00:05:06.250]six, or seven years, that debt should match in length
[00:05:13.550]to at least what you expect that asset to be around
[00:05:18.530]on your farm or ranch.
[00:05:21.030]Defer capital purchases this has been going on
[00:05:24.270]and may have to occur again,
[00:05:26.700]you may need to repair rather than replace.
[00:05:30.420]You may need to utilize FSA guaranteed loans,
[00:05:34.180]those loans are a process that your lender will start
[00:05:38.900]with the Farm Service Agency.
[00:05:42.400]Use low interest FSA marketing loans as well.
[00:05:46.620]Current interest rates are well below the bank rates
[00:05:50.360]on operating notes.
[00:05:52.020]What this does is add cash without effectively selling
[00:05:56.170]your assets, you still might be able to make
[00:05:59.350]marketing loan gains and access a higher price
[00:06:04.850]rather than having to sell your corn
[00:06:07.480]or soybeans or wheat right away.
[00:06:10.870]Increased non farm earnings,
[00:06:12.860]do you have time and resources that can be put to work
[00:06:16.730]semi, rent out tractors,
[00:06:18.820]part-time job with health insurance.
[00:06:22.930]If you don't have a spouse already working on a farm.
[00:06:27.800]Bringing a health insurance onto your farm or ranch
[00:06:31.380]is a very important thing to add cash back into
[00:06:36.710]the operation.
[00:06:38.470]Hunting or fishing guide, or maybe you have fee hunting,
[00:06:44.770]something like that boarding horses.
[00:06:47.920]You are more creative than I am about thinking of ways
[00:06:52.840]to add income.
[00:06:54.620]One family I know is doing at least five to 6K gross monthly
[00:06:59.510]in a very rural area with direct meat sales.
[00:07:03.640]So they've added that income to their operation.
[00:07:09.360]Decrease non farm and family living,
[00:07:11.620]set a family living budget,
[00:07:14.800]file that budget on a monthly basis.
[00:07:17.980]Also set a personal wage, which you draw on
[00:07:22.150]and is moved into a family living account.
[00:07:24.980]Separate out your finances,
[00:07:27.270]if you don't already do that,
[00:07:29.150]separate out a personal account credit,
[00:07:34.270]a debit and checking account and a farmer ranch account
[00:07:39.720]as well.
[00:07:41.210]Sell assets that aren't contributing.
[00:07:44.850]What are those assets around that you may not use at all
[00:07:51.050]or that are something that doesn't contribute
[00:07:55.330]to the operation but is using funding from the farm or ranch
[00:08:01.970]to continue that asset in the farmer or ranch.
[00:08:10.600]Joint machinery ownership is another option here.
[00:08:15.270]Communication and planning are key.
[00:08:18.920]You have to agree up front on how to set
[00:08:21.320]this machinery arrangement up.
[00:08:24.490]You have for instance, what about planning?
[00:08:28.300]Okay, if you own a planter with one or two other individuals
[00:08:33.940]who's going to plant first?
[00:08:36.060]Is it a rotating planting arrangement?
[00:08:39.240]Or does somebody become the machinery boss
[00:08:45.100]and make that choice?
[00:08:47.370]The person that is always good at planning,
[00:08:49.860]maybe that's the person that makes that choice.
[00:08:52.400]The person that's always the best at choosing combining,
[00:08:56.780]for instance, maybe that's a choice as well.
[00:08:59.740]There's written agreements, examples available
[00:09:02.619]and an explanation of how that process works
[00:09:06.950]are at these websites as well.
[00:09:09.568]Seek outside investors that might be a challenge,
[00:09:13.110]it might be family, it might be friends,
[00:09:16.690]maybe other farmers or ranchers as well.
[00:09:20.870]But look towards a price risk reduction strategy.
[00:09:27.600]Set a marketing plan, they don't have to be very expensive.
[00:09:34.360]They can be very inexpensive in fact,
[00:09:36.950]if you use this Center for Farm Financial Management,
[00:09:39.940]example marketing plans,
[00:09:42.330]but follow the marketing plan,
[00:09:44.550]and don't get distracted by emotion,
[00:09:47.580]share it with others that are partners
[00:09:52.030]with you in your farm or ranch,
[00:09:54.690]a green buyer, family and lender.
[00:09:59.000]The green buyer can watch more closely
[00:10:02.660]what prices and bases are than you can very often
[00:10:08.570]and can help you execute a great marketing plan,
[00:10:13.730]very quickly.
[00:10:15.180]Review and adjust that plan,
[00:10:18.300]just because you've established a cash flow plan
[00:10:23.250]at the beginning of the year,
[00:10:24.920]you should review it periodically along the way
[00:10:28.711]to see if it's fitting in with how the growing season
[00:10:34.530]is proceeding.
[00:10:37.340]Lastly, these cashflow suggestions are about surviving
[00:10:41.240]for the next year.
[00:10:42.250]Cash Flow is not profitability.
[00:10:44.720]Adding debt may make profitability harder,
[00:10:48.100]but it gets you to the cash flow for this year
[00:10:51.850]and hopefully profitability will happen next year
[00:10:55.450]so that you can pay down that debt.
[00:10:59.230]Profitability is survival in the long run.
[00:11:03.040]Ending an enterprise that is unprofitable
[00:11:05.620]improves long run survival.
[00:11:07.700]My discussion about right pricing rent
[00:11:11.880]is in part something about this.
[00:11:14.760]Have I been paying unfortunately because of competition
[00:11:18.740]too much for a certain ground that isn't as profitable
[00:11:25.860]or is not profitable?
[00:11:27.870]We have to right size that rental payments
[00:11:31.400]so that you are profitable.
[00:11:34.070]And any questions I'm always available
[00:11:37.733]on my email and here's my phone number
[00:11:41.870]that you can contact me and I always have to throw up
[00:11:45.320]a Minne Moline G-1000 Vista because that was my big tractor
[00:11:50.350]and I love them.

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Cash Flow Management: COVID and Survival

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