Farm Management Minute: Hang On to Your Cash Flow Projection
March 3, 2016
With the turning of the calendar to March, first day of spring will be quickly approaching, which would normally produce an abundance of optimism. That doesn't seem as prevalent these days as there has been a steady dose of sobering discussions over break-evens, cash flows, working capital and other farm economics the past few months. It appears most producers and ag lenders have a good grasp on the situation, especially if a detailed cash flow projection was compiled in early 2016.
Instead of filing that cash flow in some obscure location, I recommend keeping it readily available in order to monitor your financial progress throughout the year. As you are well aware, it is difficult to estimate crop prices and yields six months from now and the livestock sector is just as challenging. Nevertheless, the cash flow does provide an indication of how much working capital is needed to sustain your operation. Depending on when your major sources of revenue are realized, I would highly suggest "penciling-in" the actual results and compare them to your projections. As the year unfolds, having this information readily available may help you adjust your marketing decisions as well as capital purchases. Most lenders and producers tend to be fairly conservative on the income side, so there may be some extra cushion if you have been able to exceed the early projections. On the flip side, if revenue is not meeting expectations then it is better to be aware of this situation rather than ignore it.
Hopefully, you were a little generous on the expense side of the ledger when compiling your projections. As for crop input estimates, I think the best time to re-visit your numbers is sometime around mid-June. By then, planted acres have been finalized and most of the costs have been incurred. This timeline will also provide an opportunity to re-figure break-evens ahead of the USDA Quarterly Stocks and Planted Acreage report, both of which have a tendency to provide some big swings in commodity prices. Having a good knowledge on production expenses is an important part of controlling costs in an environment of tight margins. Overhead costs are a little more difficult to trim but it is relatively easy to track year-to-date expenditures and compare them to projections.
These same tracking methods need to be utilized by livestock producers especially since there are no built-in safety nets such as crop insurance and farm program payments. Lastly, if family living expenses are being regularly tracked, it is easy to determine if you are sticking to your budget. I realize it's not practical to check this every month, but it would be a good idea to take a good look on a quarterly basis. This will allow you to adjust spending money in one area if there are unforeseen problems appearing in another.
So, the first step is to hang onto that 2016 cash flow projection and get ready to update it as needed. This is no time to bury your head in sand! If you haven't devoted much time to understanding your financial condition, now would be a great time to enroll in our program. Please contact me at either 1-605-299-6760 or Kathy.Meland@mitchelltech.edu if you would like more information about the SD Center Farm/Ranch Management.