Ways to Stretch Cash Flow

Post authored by: Robert Tigner, Ag Systems Economics Extension Educator, Austin Duerfeldt, Ag Systems Economics Extension Educator, both with Nebraska Extension

Over time, negative cash flows will put farm and ranch businesses, and the lifestyle of the owners, at serious risk. The following suggestions for additions to cash flow are adapted from Iowa State Extension AgDecsionmaker C3-58, Farm Financial Management: 16 Ways to Stretch Cash Flow, https://www.extension.iastate.edu/agdm/wholefarm/html/c3-58.html, written by William Edwards, retired extension ag economist.

  1. Cancel or re-negotiate leases that are unprofitable. Not all cropland is worth the same as other land. Rental rates should fit the productivity of the land. Flexible cash rents or a crop-share lease can be proposed in place of fixed cash rent.
  2. Use financial reserves. These may include savings, liquid financial assets such as stocks or bonds. However consider the taxes that may accompany selling investments. Review current market prices and your basis to determine capital gains tax owed.
  3. Sell current assets. Current assets include stored crops and market livestock. But don’t simply sell off market livestock that might be discounted as they are not yet finished since the discount could be too steep,
  4. Use credit reserves or unused borrowing capacity. Analyze the decision to use more debt first and have a realistic plan to repay that borrowing.
  5. Refinance debt by sing equity; lengthen repayment terms or refinancing loans with balloon payments. Here again look at the ability, if needed, to refinance the balloon payment
  6. Defer capital asset purchases. Sometimes making a purchase or leasing could reduce costs by lowering repairs that use more cash than the lease or purchase payment. Analyze carefully which strategy best reduces cash flow.
  7. Utilize FSA Guaranteed loans.
  8. Utilize FSA low interest marketing loans. Placing grain under loan can be used to pay off high interest rate loans.
  9. Increase non-farm earnings. Even if one member of the farm family is already working off the farm now, all may need to at least for a time.
  10. Decrease non-farm and family living expenditures. Set and use a family living budget. The budget needs to prioritize expenditures to those necessary such as utilities, food and health insurance. Defer expenditures such as vehicle purchases, vacations, recreation expenses and discretionary expenses.
  11. Sell assets that aren’t earning their keep. Farmland that is consistently unprofitable, machinery that costs more than custom work or assets that no longer have a use on the farm or ranch meet this definition. Consider selling them to raise cash. Funds gained from the sale can be used in more productive manner such as paying down existing debt, or investing into an asset that will provide returns.  Capital gains tax will be owned on any business property that is sold for more than its reported basis.  For assets sold that were held longer than one year that capital gains tax rate can be 0%, 15%, or 20% depending on your taxable income and filing status.
  12. Joint machinery ownership. This can work but communication and periodic compromise may be necessary for success. Spending time in the beginning creating a written agreement can avoid unnecessary fallouts later on, and periodic reviews of the agreement insure that it remains relevant.
  13. Seek outside investors or lenders such as family. Think through lending to or borrowing from family. It can be a difficult situation for all involved.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s