If you buy into the current headlines, there is no doubt that fear is driving the bus.
But I have learned one thing in working with family businesses over the years: focusing on cash flow can help fight business fear.
As we come to the end of 2016, the ag economy is in a tough spot and it’s time to pay attention to business spending that impacts cash flow.
Paying attention to the little things that drain your cash flow will bolster you when the inevitable “Black Swans” — unexpected events that destroy income flow – swim into your business life. These can happen at any time. Take some time at the end of this year to look at your core disciplines, get lean and manage your business with a heightened awareness.
Why focus on cash flow? Your cash flow statement is like a fuel gauge, indicating how much cash you have left and when you need to refuel. You can’t run a business if you run out of cash. It is a key document that lenders often look at to help determine the capacity, or the ability of the operation to repay its debts. And while it’s an important document to have on hand when seeking financing for your operation, it’s also a valuable management tool.
The cash flow is the key statement in tracking your business over time. It tracks all cash coming into the business, and all cash out, over a certain timeframe. It’s different from an income statement or balance sheet in that it’s limited to only showing changes in the cash available to your businesses due to a variety of factors. It can be done on a monthly or quarterly basis. It helps document your farm’s ability to generate cash and cover expenses. Farmers typically use them on an annual basis. I like to use them as a way to summarize a business, either end of year or end of month.
Look intently at transactions. Cash comes into the business in form of sale of products or assets. You can study your cash flow to find your biggest expenses; for example, look at the top three expenses and see if there is anything that can be done to reduce those expenses.
The cash flow statement can tell someone quite a bit about your spending habits or the maturity of your business. Typically, new businesses have a more difficult time showing a positive number, as the business might not yet have reached a critical volume of sales, or it could be spending cash to generate inventories to sell at a later date. A more seasoned business might have taken on more debt to finance an expansion, so you might see a net positive from operating but a net negative from financing activities.
During a downturn in ag markets, a weaker cash flow statement can be explained, especially if it’s due to tough market conditions. In fact, it can be a good budgeting tool to have in down cycles to get a better idea of any cash shortages and what you might be able to do in both the short and long term to fill any gaps you have.
For anyone out there who wants to master the cash flow statement, you have to understand the nature of capital activity. Here is a great tutorial on cash flow statements from the University of Vermont: http://blog.uvm.edu/farmvia/?page_id=447
No doubt you’re working hard to figure out ways to tighten your belt even more than you already have. It doesn’t matter how well you budget or how efficiently you manage your business, there may be periods in which cash flow is negative. No one knows for sure when these periods will occur, and how long will they last, but every operation should have a financial contingency plan to provide for unexpected cash flow shortfalls.
Communication is key during difficult times. Sharing farm-related issues and financial matters with business partners ag lenders, farm advisors, and family members is extremely important during challenging times in the farming business.
Fight fear with communication and measurable cash flow statements. Remember, you can’t manage what you don’t measure.