Watch cash flow like a hawk when times get tougher

Canada’s Farm Progress Show just wrapped up in Regina for another year. It’s a great opportunity to talk to farmers from a pretty vast geography because they travel long distances to attend.

I made a point of asking everyone I talked to how their crop looked. The general response was “pretty good, but could use some rain.”

Some areas are sitting better than others and by the time this article appears, crop conditions will be better or more dire depending on where you farm. Here’s hoping you’re in one of the fortunate zones. It seems that when there’s a lack of significant and general precipitation, it comes down to the luck of the draw from a thundershower or spotty weather system perspective.

A farm show is not the place to get into detailed discussions about potential implications arising from a lack of precipitation, and thus low yields.

However, one person did mention that they had capitalized too much of the relatively recent upside in the grain, oilseed and special crops sector. The person went on to say how concerned they now are about narrowing margins and low yields — and how quickly their liquidity is going to erode, especially in a drought situation.

It is, I think, somewhat of an aspect of human nature that will be a reality for a lot of farmers — when things are good, the purse strings can get a little looser. There is less attention to financial management in general.

Questions follow from discussions on eroding liquidity and generally weaker financial performance. Essentially, what can be done about it.

My first recommendation is to focus on financial performance in general. This applies to all farms, even if there are no current financial concerns or issues. Four things come to mind:

  • Strategically manage the investments you make going forward.
  • Monitor your overall debt load and specifically, look at the relationship between long-term and short-term, or current debt. Current debt is the portion of your overall debt that’s due in the next 12 months.
  • Manage your liquidity (cash flow). This requires careful attention to different aspects of the business but importantly includes concentrating on marketing.
  • Focus on operating cost control. This is easier said than done. Be mindful of discretionary spending. For example, can you put off replacing the tires on your tractor for a year?

My second recommendation is to watch your cash flow like a hawk. There are three things you can do:

  • Calculate your average working capital for the past five years. Working capital is the best liquidity indicator. Note that if your farm has increased in size in that period, you may need to make an adjustment to the average to arrive at a reasonable current value.
  • Determine how much additional working capital you think you should have to act as a buffer to the financial pressures you’re facing.
  • Work to adjust your management practices so that you can achieve, and maintain, the working capital you need. In some situations where the short-term debt is high and working capital is inadequate, farmers may not be able to achieve sufficient working capital by adjusting management practices. In these situations, debt restructuring may be required.

Here’s a suggestion you can look at from a marketing perspective. Obviously, you want to get the most you can out of the marketplace. If the yields are down, then this becomes even more important. We’ve all heard about the price range where most of the grain gets sold. A first step in understanding how your marketing approach is working is to calculate your average selling price for each commodity you produce.

Simply take the gross revenue from each crop sold in the last year. Then divide that value by the number of net bushels harvested. This gives you an average price for each bushel sold during the year.

Next, compare that price to the average selling price of the commodity for the year. Are you above or below the average? I suggest that you make this calculation for each crop for at least the past three years and ideally five years.

Are you satisfied with your results? If so, great. Keep up the good work. If not, check to see what you could look at doing differently so that your average selling price improves.

Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or terry.betker@backswath.com.

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