Project Cash Requirements for the Coming Year
Source: University of Wisconsin Extension
Although 2011 is turning in strong financial outcomes, many dairy producers experienced challenges in meeting cash flow needs over the previous couple of years. As the challenge to pay bills as they come due increased, so did the stress experienced by farm managers and their families. With on-going price volatility on both the input and output side of the production equation, what can be done when the past repeats itself?
Volatility of input costs along with the prices received for milk actually increases the need to project cash in and out flows for the coming year, says Ken Bolton, a dairy management specialist with the University of Wisconsin Extension.
To keep current in a time of constant change also indicates the need to reevaluate projections regularly and where indicated, make needed adjustments. The end result is the identification of when cash excesses and shortages will happen in advance of actual occurrence, says Bolton. This allows mangers to plan for various contingencies and better manage the situation as compared to having to react to a surprising development.
Iowa State University (ISU) offers suggested operating adjustments in the short run when positive cash flow is predicted for the year but negative for certain months including:
-- Shifting the timing of sales of excess feed or livestock.
-- Shifting the timing of some expenses such as cropping prepays or capitol purchases.
-- Increase short-term borrowing in periods of planned negative cash flow with projected repayment in periods of positive cash flow.
-- Delay the payment date of fixed debt payments to match periods of positive cash flow.
-- Lock in certain input costs to lower cash flow fluctuation risk.
-- Lock in a certain amount of milk sales to further limit cash flow risks.
An old business planning saying states that "If you don’t know where you’re going, any road will get you there." By planning where you’re going financially, you can manage not only to travel the straight, smooth road but improve the chances of arriving safely at your destination. In addition, mangers who document their business plans and share them with their lenders find themselves in an advantageous position when the time arrives to cover cash shortages with operating loans.
According to ISU experts, when the plan indicates more than just single months of cash flow shortages leading to negative projections for the entire year, adjustment alternatives can include:
-- Make input-output production changes to increase financial efficiency.
-- Sell intermediate or long-term assets to raise cash. (This may cause more severe problems next year.)
-- Carry over operating debt to the following year.
-- Postpone capital purchases or finance with credit.
-- Reduce the size of intermediate and long-term debt payments by lengthening the repayment period.
-- Refinance short-term debt to intermediate debt.
-- Reduce nonfarm expenditures or increase non-farm income.
With the prospect of on-going dairy industry price volatility, the level of price risk remains high. Both conditions underscore the importance of projecting, monitoring and managing cash flows for the foreseeable future. This is a function common in some areas of production agriculture but has only risen in importance in milk production over the last few years. Adopting this management tool increases accuracy of business decisions and lowers financial risk by maximizing Working Capital and limiting Equity loss. In short, informed cash management puts the manager more in control of the production function. Added information, time to react and control more importantly lowers farm manager stress.
Additional information about cash flow management is available from the Ag Decision Maker financial statements website at http://www.extension.iastate.edu/agdm/wdfinancial.html. Select "Understanding Cash Flow Analysis" C3-14 and "Twelve Steps to Cash Flow Budgeting" C3-15.
Your county agricultural agent, farm records association field staff and technical college farm trainer also has access to the new, innovative cash flow planning program "Planning for the Next Swing in Milk Price" which streamlines the process allowing you to spend more of your time managing your successful future. Give them a call today to learn more about managing cash flow and your stress level.
This educational program is support by a North Central Risk Management Education Center Grant.
