Cash is the lifeblood of a business, but with so much emphasis on profitability, this can be easily overlooked, says Rick Dehod, farm financial specialist with Alberta Agriculture and Rural Development.
“Of course, the bottom line is important, but poor cash flow management can drive a growing and/or profitable company out of business,” said Dehod.
“In the previous five years, we have seen a lot of farm families choose to expand and grow their farms. This has been through the investment of their equity and retained earnings but also with debt.”
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With margins tightening, the risk to the farm’s viability and ability to meet all of its commitments as they come due has increased, he said.
“The risk is especially great for those expanding farms and those individuals in the beginning of their careers who levered their equity to grow.”
It is important to review your cash flow projections and your marketing plans, said Dehod.
“Cash flow projections are critical, especially in times of need, but you don’t have to wait for a crisis to benefit from good cash flow planning. A properly developed cash flow projection can help a business foresee and prepare for potential shortages.”
Cash flow management can also help:
- Maintain adequate cash reserves to pay bills and payments on time or invest in expanding the business should an opportunity arise;
- Reduce interest costs through managed borrowing;
- Increase interest income by transferring surplus funds into interest-bearing accounts temporarily, if appropriate;
- Control costs by having the cash available to take advantage of buying inputs at favourable prices;
- Improve relations with the bank manager and trade creditors;
- With planning for the next crop year.
“Businesses that prepare cash flow projections often learn something about their systems, and the dynamics of their business,” said Dehod. “The process often has other positive outcomes. For example, you might discover that you need to pay more attention to markets to obtain the right price. Or you might get a better understanding of your cost of production so you can determine what a profitable price may be, now that you know your yields.”
Winter is a good time for planning, including cash flow management.
The Cash Flow Analyzer is available on the Alberta Agriculture and Rural Development website. More info is also available at the Ag-Info Centre at 310-FARM (3276).
