Many farmers have seen the importance of having and using an accrual-based financial projection for their operation. This tool helps isolate a single year so that the farm leader can understand their operation’s true profitability.
But do you also know what your farm’s exact cash needs are for the year? This is best done in a detailed way: plotted out ahead of time as a month by month cash needs projection. This is different from looking at the year on an accrual basis. A month by month cash flow plan helps farms keep from getting caught off guard at certain times of the year when cash tends to be tight.
A cash needs projection gives you the opportunity to see – all laid out in one place – exactly what you’re going to owe in a particular month, whether that’s cash rent or crop insurance premiums. Right now, you want to know what you’ll owe each month through this fall and into the beginning of next year.
Most farmers are already aware of when their major expenses are due, like cash rent or land payments. But it’s important to get every expense item accounted for so you don’t ever have to be surprised by anything – and end up having to sell grain at a price you don’t really like just because you need the cash.
Your projection can help alert you in advance if there will be a situation where you’re short on funds. Then you could choose to have a conversation with your banker several months in advance rather than a last-minute request for an operating line extension, for example.
More banks are starting to require their clients to provide more detail around cash needs projections. Whether your bank currently requires that or not, it’s time to get ahead of the game – and sharpen your management skills while you’re at it. This type of information can help you manage your operation more tightly.
Right now, our ag finance advisors are working with farmer clients who want to get this information proactively in place for their operations. The farmers are recognizing that they’re better able to manage the financial side of their operations when they are very on top of their farm’s cash needs. They’re able to use the information to help make better decisions for their overall operation.
One thing you might uncover in the process of working on a cash needs projection are major payments that are regularly due in late summer. That’s generally not when most row crop operations have a great deal of cash available. It’s important to plan ahead so big payments are due at other times of year when there’s more cash available.
Staying regularly updated with your cash needs projection, once it’s created for the year, is key. Doing a monthly or quarterly update, depending on your operation, is best for most farmers. The update needs to include entering actual figures to keep the numbers up-to-date and accurate.
Getting and using a cash needs projection is all part of running the farm close to the numbers. The farm leader is able to make better decisions knowing exactly where their operation is at in terms of upcoming cash needs. Work with an ag finance advisor to get this information in place for your operation or fine-tuned if you’ve already started the process.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.