Farm Management Minute: 2016: Stick to your spending plans!
March 31, 2016
While preparing to write these articles, I occasionally look over past ones for reference. A previous title was "Working Capital: What is it? How much do I need?" Working capital is defined as the difference between current assets and farm liabilities. It is the amount of cash or readily available assets that the farm has over and above its current portion of debt. The amount of working capital on January 1st is the financial "cushion" that an operation has to begin the year to weather the upcoming season. In multiple operations I work with, I saw this amount erode for farms from 2014 to 2015, then wither away more or in some cases became negative by January 1, 2016.
Here are some of the reasons that has happened:
1.) Crop and livestock prices have declined. This decreases the value of inventories on hand and sales that were made did not lower operating loan balances as much as envisioned. Most input expenses have not declined significantly. An exceptional crop yield offset the lower prices in multiple cases but can we cannot expect that again when forecasting this year.
2.) Purchases of capital items over the previous 2-3 years; whether fully essential or not, possibly for the purpose of reducing tax liability, and setting up loan payments for multiple years. It is easy to justify an investment when the going is good, but making the payments when the margins have diminished puts a strain on working capital.
3.) The purchase of many seemingly small items from short term operating. Over a few of the prosperous years this added up substantially on some operations, and now with margins tighter or even negative upcoming this year, it may be necessary to term these equipment purchases out to intermediate loans if your debt structure allows. This should be viewed as a one-time fix and the above scenarios avoided again. The sale of some lower productive assets may be necessary.
4.) Increases in personal spending. Needs little explanation, but requires discipline. It seems our culture spends money if it is available, but when things are tight you must find ways to decrease this category. You may say this is not a business expense, but it has a direct effect to what is available to pay down your debt.
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With cash flow projections very tight for the forthcoming year, it is imperative that you stick to your spending plans. This includes everything from adhering to a quest you've made to reduce input costs (it may be the most profitable to ignore a minimal weed or insect infestation) to controlling/capping personal spending. Your cash flow projection should include a marketing plan to protect any potential profit. Watch for planting intentions and progress reports. Like it or not, outside trader's emotions often spur rallies. Have orders in place to act on your intentions. Capital spending must be reined in, even though it might be some enterprises' turn for an upgrade this year. Prepare a family living expense budget. These all seem like general statements, but we must practice what we've planned to remain in any business. When writing these columns, especially my comments including the words do/did/don't/have/had/shouldn't, I don't often have to look for resources other than the mirror!
Keeping accurate records and matching them with a monthly cash flow projection can help you stay on course with your spending. We have computerized software and cash flow tools we recommend to F/RBM students in our program. Just like having the most recent technology available for field mapping, genetic testing, etc.; your frequency of use, implementation, examination of data and discipline to the results given from these tools provide the keys to your success. You can reach me at email@example.com, or 605-770-0758. Website http://www.sdcfrm.com