Early-Planning the Cash Flow
Most farm businesses become aware of financial solvency issues when cash flow becomes tight. Obligations start piling up in the short and medium term. This is a case of a poor planning phase. “For example”, says Roberto, “Our COGS ratio went overstated from our projected sales and now I do not have the cash to cover up the dues to the workers’ pay and other dues for next month.”
The opportunity cost of rearing own replacements and forfeiting the expected profits from sales is a cost that farmers should be aware during any period.
Here is a typical list of some issues:
- Building up stock from cash flow
- Carrying out excessive capital expenditure
- Outstanding debt
- Cost of production
- Farm issues (environmental) – Force Majeure (unavoidable at these circumstances)
Seek the Breaking Point. Soon.
It is important that every business knows the point where to cover their costs of doing business (the break-even point) when making business decisions.
“Roberto, a break-even point works when you know what you have to do or when you have to take steps to counteract it.” His assumption on risk was not to look at forward fixing prices, where his financials ended up overstated. He said: “I guess I need to start taking the fixed price option”.
If a certain amount of margin can be fixed, then a creation of security can be guaranteed. By doing so (the gain not the loss!), the revenue can now be banked and included in continuous budgets in line (seek more run-ups!).
Most common mistake farmers make with cash flow planning is not looking at it in enough detail. Roberto was keen to highlight the danger of false savings when cash flow was tight. We advised him that, “The old adage is that every action has an equal and opposite reaction, so everything you do has a knock-on effect somewhere. There’s no point saving now and it will cost him five or six times later; i.e. detoxifiers on the Jathropa trees.”
Work the cash flow… again
Farmers must take the approach that cash flow budgets should be their lifeline device and should be continuously reexamined and adjusted upon circumstances, market fluctuations. As we said to Roberto, “You need to be stubborn for growth, get through the hurdles and be ready to change your original plan as many times as it takes. Take the lesson that implicates learning for the cause of the cash flow issue and do not let it happen again. “
Develop a solution… always
With cash flow pressures recognized, now is the time to take action and identify how to meet any deficits – assuming they occur again. Please consider the list below:
- Hold off build-up stock numbers (cut spending and increase efficiency in production)
- Reduce and control working capital (audit set wages)
- Place current CAPEX from cash flow on new investment (growth stage turning point).
REMEMBER: If you are experiencing or expect to experience cash flow difficulties, the important thing is to remember that there are a number of solutions available, perhaps a re-assessment, re-valuation or raising funds. Take the time to inform yourself, identify the cause or causes of the problem and estimate the level of support required.