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Six Steps to Building Cash on Your Farm (Article)
By: Matthew Lange, Business Consultant
TAGS: Grain, Dairy, Swine, Young, Beginning Farmers, Women In Agriculture, Risk Management Planning
 
January 26, 2017 -

As Warren Buffet said, “You need cash. Cash is like oxygen. When you don’t need it, you don’t notice it. When you do need it, it’s the only thing you think about.” A lot of us in production agriculture are living examples of this concept. Markets over the last 18 to 24 months, and even for the foreseeable future, have forced many to think about one thing only…the need for cash. Is it possible to avoid a situation where a business is devoid of cash?

Cash is sometimes historically viewed as an unproductive asset. Basically, idle cash is not making money, one should invest it elsewhere to generate greater return. Given the volatility in commodity driven agriculture, cash should not be viewed this way. Being smart about cash allows you to leverage your money and take advantage of opportunities as they arise to position your business for long-term success. It also helps finance operations and reduce market risk. While markets may still force businesses into a cash crunch, those that build stronger cash positions coming out of good cycles heading into down cycles will withstand the turbulence better than those who are fairly tight on cash.

But, how do we get there? How does a grower get to that point of having a cash surplus? To help us look at cash generation, we’ve compiled a list of best practices used by top producers to help you in generating more cash for your operation.

  1. First and foremost: maximize productivity. Sometimes in cash-strapped businesses, cost cutting measures backfire and negatively impact productivity. We need to consider the net return of an expense. Cutting a particular fertilizer or chemical may have detrimental impact to yields. Consider stress testing a cost for its net impact. For example, how much of additional yield do I need to get in order to use a fungicide on my corn? AgStar has a margin manager tool that lets you run different scenarios to give you a comparison on where different options would impact your capital position.

  2. Cash Outflow. Understand which cash outflows usually don’t decrease when markets decrease margins. Leased equipment, land rents, family living withdrawals, utilities, etc. These are cash outflows in business that while they could decrease, in actuality, very rarely do when markets are down. In fact, in many cases these cash outflows increase when cash is available and never seem to return to prior levels. These cash outflows can enter a very dangerous area of becoming quasi fixed costs. It is important to understand how to control these costs and limit their growth. We must also consider at times, how we can reduce their impact.

  3. Limit Loss. This comes up a lot when I discuss land rent with farm operators. In many areas of the country that I work in, land rent is overpriced for the return. We have to face reality. Very few farmers like to give up rented land or even consider selling land that they own. At what cost to the business though? I encourage operators to look at each parcel of land and breakdown the cost and revenue of that piece. Even though we may give up land to the competition, it may be the best avenue for our business and its cash flow.

  4. Scrutinize repairs and replacements. This always seems to be a constant debate, regardless of our cash position, because sometimes when a piece of equipment needs to be repaired, we automatically send it in for repair 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 or more efficient at a lower cost? Same thing goes in-house versus outsourcing labor or specialized services. If we have a large equipment line that has a great deal of debt to run our cropping enterprise, perhaps we need to evaluate outsourcing that and reducing our equipment line to make the operation more cash efficient.

  5. Liquidation of non-performing assets. Most operations have already gone through this process. It’s unusual in the current environment to have 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 there’s a source of revenue to investigate.

  6. Lastly, I think it's always important to look at debt structure. Speak with your lender, with your consultant or your advisory team to look at how to perhaps re-balance debt. Can things be adjusted in a certain way that helps reduce our cash outflow?

These are all short-term items that can help generate more cash and put us in a position where we have extra cash. Evaluating these six steps, better position your operation cash-wise and help sustain your business long term.

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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.
Contact Matthew Lange
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