Carl Sohn

Managing Cash Strategically

Carl Sohn, Director and Business Advisor

Smart drivers never set out on a road trip without a plan for fuel along the way, especially if there will be long stretches without gas or recharging stations. Cash is the fuel of business, and smart operators always have a plan for how to fund operations throughout the year. In production agriculture, cash planning is especially important because there may be long stretches without cash inflows. The cash flow budget can help you proactively anticipate cash shortfalls and use cash strategically.

The Cash Challenge
In production agriculture, there can be a significant time lag between cash outflows for production expenses and cash inflows from sales. An operating loan bridges a portion of the gap, but lenders generally require owners to invest a portion of their own cash in the operating cycle. As a result, ag businesses have to be particularly diligent about how they allocate cash.

Several factors exacerbate the cash challenge in agriculture:
  • Commodity Prices:  Volatile commodity markets make predicting sales challenging (at best), highlighting the importance of risk management and marketing plans. During periods of declining commodity prices, cash management is particularly important and difficult, as producers plan and incur production expenses when market prices are higher than when sales will occur. 
  • Bumps in the Road:  Agriculture is an unpredictable business. Unexpected expenses, Mother Nature and personal needs often place unexpected demands on scarce cash resources. 
  • Growth:  Expansion requires a lot of cash. Not only does growth require cash for down payments and other upfront costs, growth also requires cash to fund increased operating costs. These additional cash demands from growth all occur before the operation receives incrementally more cash from increased future production.
Sources of Cash
When a cash shortfall catches you by surprise, there are several options for generating cash in a pinch.
  • Borrow:  If the business has additional borrowing capacity, the operating loan is a good option to get through short-term cash shortfalls (as long as borrowing will not compromise the ability to pay the line down later). New long-term loans are also a source of cash, but may take time to process and close, especially if the business is experiencing an unexpected cash shortfall.
  • Sell Stuff:  Selling stuff works, especially if the business has built a sufficient cushion of working capital. But there are two major drawbacks to selling when forced: (1) there is a low likelihood that the value or price of assets will be at its peak and (2) asset sales may generate taxes when cash is most needed.
  • Contributions from Owners:  Owner contributions are an option, but may not be possible if owners have most of their personal wealth invested in the business that is already short on cash. Even when possible, contributions to fund an unanticipated cash shortfall can be messy when the decision involves multiple parties or when owners have reserved liquid assets held outside the business for retirement.
These options all take time away from core business operations or compromise financial return. While many circumstances fall outside the business’ control, a clear and complete plan can significantly reduce the risk of running out of cash during the year.
The Cash Flow Budget
A cash flow budget is a simple and powerful tool that can help you strategically manage cash through the production cycle and build contingency plans for inevitable unknowns. The budget reduces the likelihood of surprise cash shortfalls and addresses tradeoffs between operational, strategic and personal priorities. Click here to download a template spreadsheet.
  • Build It. For each month in the year, start with beginning cash, add cash inflows, subtract cash outflows, adjust for debt payments and finish with the ending cash balance. While it might seem daunting, the cash flow budget is easy to build.
Cash Balance
Cash in checking and savings at the beginning of the month.
Cash Inflows
Cash received during the month from business operations and off-farm income or other personal investments.
Cash Outflows
Cash spent during the month to fund business operations, family living and other personal expenses.
Asset Activity
Net cash impact of capital asset purchases and sales during the month.
Loan Activity
Net cash impact of loan proceeds received or payments made during the month. Consider both long-term and operating loans.
Cash Balance
Cash in checking and savings at the end of the month.
If you’re worried about the math, download this easy-to-use template. You can always walk through the process of inputting information with your Northwest FCS relationship manager. While it will never be perfect, the process becomes easier, faster and more accurate over time.
  • Use It. Once built, the cash flow budget is a powerful management tool that can enhance decision-making in nearly every aspect of the business, especially if you track actual versus budgeted results. There is a catch, though. Like any other management tool, if left on the shelf, the cash flow budget is only worth the paper it’s printed on.

Just like that smart driver who knows where to buy fuel along the way, business managers need to know where cash will come from to fund the business throughout the year. Without a plan, surprise cash shortfalls are much more likely, especially during down-market conditions. Building a cash flow budget can help managers think through cash uses and needs, transforming a reactionary scramble into a strategic advantage