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Five Components to Increase Cash Flow on Your Farm (Video)
By: Matthew Lange, Business Consultant
TAGS: Dairy, Grain, Dairy, Swine, Women In Agriculture, Young, Beginning Farmers, Risk Management Planning
 
January 17, 2017 -

Hi. I'm Matt Lange, Business Consultant with AgStar Financial Services.

When we think about working capital, one of the major points is cash and — undoubtedly, in a year like the year we've been having — cash seems to be at the top of mind for a lot of farmers, a lot of producers in the ag community. Cash is sometimes historically looked at as, perhaps, an unproductive asset. When we have a lot of it, we should be doing something with it. I think Warren Buffett's quote says it best. "Cash is like oxygen to our business. When we have it, we really don't think about it, but when we don't have it, we're thinking about it all the time.” I think that's probably apropos given where our markets are right now and where a lot of cash statements and balance sheets are for producers.

How do we get to that point where we have a lot of cash? To help us look at cash generation, I listed a few bullet points that will help you in generating more cash for your business.

  1. First and foremost: maximizing productivity. Sometimes in cash-strapped businesses, when we start looking at cost cutting measures, we do it at the expense of productivity, whether it's a dairy operation, maintaining high production, herd, doing it cost effectively, or it's a cropping operation, making sure we're maximizing our yields on the field. We have make sure we're staying productive in our business.

  2. Secondly, addressing those key drivers within business, so evaluating key cost drivers. In a lot of livestock operations, feed is the number one cost driver. For a lot of agriculture, labor is high on the list. When we talk about labor, that's not just our hired labor. That's also family living withdrawals we're pulling out of the business. Fertilizer and chemical expenses on the cropping side, and repairs and supplies. These are just a few of the major cost drivers in our businesses. When we look at evaluating, I'm not suggesting pure cost cutting. Sometimes pulling certain feeds out of the ration actually reduces productivity and does more harm than good to our business. Maybe there are things that we can do in locking in feed prices when they're lower. Maybe we can adjust the rations by looking for complementary feed ingredients that have the same value but a lower cost. These are some of the primary objectives we need to do to generate more cash.

  3. Down the list, we could look at scrutinizing repairs and replacements. This is always a constant debate, no matter where our cash position is, because sometimes when a piece of equipment needs to be repaired, we send it right in without any questions. But we need to look back at each individual equipment item on our balance sheet and really ask whether we should be repairing it or if the repair costs have gotten to the point where it justifies actually replacing it. Could we be more productive, could we be more efficient at a lower cost? Same thing goes with looking at doing activities in-house versus outsourcing. If we have a large equipment line that has a great deal of debt in that service to run our cropping enterprise, perhaps we need to evaluate outsourcing that and reducing our equipment line to make the operation more cash efficient. That may be an option for some.

  4. Another good practice is looking at potentially liquidating non-performing assets. Most operations have already gone through this process. We don't have pieces of equipment or assets just sitting there not generating revenue, but it's always a key item to go back and evaluate, "Hey, are we getting the most value out of this piece of equipment or this particular asset?" If we have a lot of wooded acres that we own, are we generating any revenue off of that? Maybe that's an item that we could look at liquidating.

  5. Lastly, I think it's always important to look at how our debt is structured. Speaking with your lender, with your consultant or your advisory team to look at how we can perhaps re-balance debt. Can we move things around in a certain way that helps reduce our cash outflow?

These are all short-term items that can help generate more cash into the business to get back to a position where we have a lot of cash. When we evaluate these five steps, our businesses will be in a better position cash-wise and help us continue the business long term. A always, if you have any questions, check out agstaredge.com Thank you very much and have a great day.

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Matthew Lange
Business Consultant
Matt Lange is a business consultant at AgStar providing financial management expertise to dairy producers and managers. Prior to joining AgStar Financial Services in 2012, he was employed with the Wisconsin Department of Agriculture, Trade and Consumer Protection, where he worked in the Wisconsin Farm Center assisting farmers in crisis and mediating disputes between agricultural businesses.
 
Matt has earned a B.S. degree in Agricultural Business and Political Science from the University of Wisconsin, Platteville, a M.S. in Agricultural Economics from Purdue University, and a M.B.A from Indiana University.
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