Cash Flow Planning for 2017

Planning is a common activity for farm and ranch managers and operators. It includes crop rotations, when to wean, when to sell crops or calves and when to take an LDP. All of those activities inevitably lead to cash and income. “Cash Flow Statements”can be used to plan an agricultural business’ need for borrowing, when to make payments for various expenses or when to make crop and calf sales.

A statement of cash flows summarizes cash inflows and outflows for a specific time period. It can be used to project, pro forma, future cash flows or to summarize past cash flows. Cash inflows include product sales or sales of capital items but also borrowing and investing. Cash outflows include loan payments, supplier payments, machinery lease payments, land rent payments, taxes and family living draw. The size of all these matter but so do the timing of the cash flows. A proforma cash flow statement allows the farm and ranch manager to set up lines of credit, plan crop sales, plan vacations, project tax payments and even which crops to plant. The statement of cash flows is usually done either quarterly or monthly.

Proforma cash flows can be prepared either by:

1. use last years actual cash flows to project the coming year’s cash flows.
2. project the coming year’s cash flows from each farm enterprise with details about probable prices, yields, expenses, family living draw, property taxes, income and social security taxes.

The first method is quicker but unless it is adjusted for crop price and yield variation, changes in input costs, changes to debt servicing, likely changes to tax liability and changes to family living it may be too far off the mark. Many farmers already calculate costs and returns for their crops or calves. These are called enterprise budgets and can be used to build a cash flow using the second method. This second method also allows the user to mix enterprises as needed to increase profitability and increase positive cash flow.

Many tools are available to help with cash flow development. Nebraska Extension will soon publish the “2017 Crop Budgets” at http://cropwatch.unl.edu/budgets. Right now the 2016 budgets are up. Iowa State University Extension has an article further explaining cash flow budgeting and two Excel spreadsheets to help with the process at http://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html. Oklahoma State University has a paper form for cash flow budgeting, http://agecon.okstate.edu/annie/files/F-751%20Cash%20Flow.pdf. The University of Minnesota has an online workshop about cash flow at http://ifsam.cffm.umn.edu/StatementCashFlows/Default.aspx?SectionID=5 to help you further understand cash flow planning. Nebraska Extension also has a web video that helps explain Cash Flow Planning at https://vimeo.com/188871642.

 

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Communicating with Lenders: Suggestions for Farmers & Ranchers

The last few years have been tough for many farmers, feeders and ranchers due to a cost-price squeeze. I reviewed the 2015 Nebraska Farm Business INC financial standards measures. Average 2015 Net Farm Income was $51,293 which doesn’t sound terrible until you get deeper into the numbers. The farms are broken into 10 equal groups, deciles, ranked by Net Farm Income. The bottom four deciles of farms were unprofitable with the lowest decile averaging -$109,508 net farm income. At the beginning of 2016, the bottom three deciles had negative working capital with the lowest decile averaging -$244,880. The numbers above and the current cost-price squeeze will probably worsen the financial position of additional farms and ranches. Fortunately equity has increased for many farms and ranches and that can be used to shore up current lending needs. Communicating with lenders  will be an important activity over the next months. Here are suggestions for that conversation’s success.

• Always be upfront about the exact situation, sooner rather than later. Be frank about what your financials are but don’t talk with the lender constantly.
• Make sure that all your financial documents are accurate. Include all machinery leases or outside lending listed on the correct financial documents. Consider producing a farm and personal balance sheet including credit cards on the balance sheet.
• Do your own cash flow projections for 2017 now. A cash flow projections allows you to discuss your needs with your lender. The process of making a cash flow projection can be very illuminating to operators. The cash flow projection can guide marketing plans as well. Update the cash flow periodically during the growing season and share the update with your lender.
• Explore marketing plans, write one and implement it. Again marketing plans should be flexible as new information comes forward. Again share your marketing plan with your lender.

The foregoing suggestions show a borrower that is proactive and forward-looking which is a very positive asset that lenders want to see. Be proactive!