Managing Cash Flow Stress

 
  From the June 19, 2017 Issue of Agri-News
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 “With the 2016 harvest extended into the spring of 2017, some producers are having problems with cash flow and with meeting their farm’s ability to meet all of its commitments as they come due,” says Rick Dehod, agricultural farm finance specialist (AF). “A large portion of the snowed-under crop is either in the process of being harvest or has been harvested. Alternatively, some acres have been dealt with under the Agriculture Financial Services Corporation (AFSC)’s unharvested acres’ process.

“Once the 2017 crop is in the ground, producer’s attention will switch to valuing these spring-threshed crops and determining how best to market them to provide the much needed cash flow to get the farm to the 2017 harvest.”

Dehod says there are several things that can be done to deal with a tight cash flow.

“The first is step to do an assessment of the cash flow shortage, and determine if it’s a short or long term one. What may be the solutions to address this? What funds will be coming from crop insurance? Crop value and sales? Availability of the spring cash advance program? Other resources?

The second step is to determine the farm business’s equity position and its ability to survive the cash shortfall. “Having an update net worth statement will provide you this information,” explains Dehod. “Higher equity provides your business with the ability to withstand a longer term serious cash flow shortage because this you are able to borrow against your equity. Businesses with lower equity options could be limited.”

The third step is to decide whether the farm has to improve its cash flow and working capital position for both the short and long terms.

“Most producers have had on-going dialogue with their bankers and creditors regarding their farm’s ability to meet all its commitments. Communication is utterly important. Your account manager may be able to give you feedback on your ideas and possibly some strategies to improve cash flow and working capital. Looking at all options will focus you on all alternatives and possible solutions.”

If it is a short term problem, Dehod says producers can look at their AgriInvest accounts. “AgriInvest is one of the business risk management programs under Growing Forward 2 (GF2), and it helps producers manage small income declines, and provides support for investments to mitigate risk.

“If you’ve identified a long-term problem, it may be that an interest only payment can be negotiated and the principal portion of the payment postponed for one year. If long-term problems are identified, then the primary cause of the cash flow problem must be found by examining the efficiency, the scale and the debt structure of the farm business. Efficiency is measured by the physical and economic output of the business. Scale refers to the size of the business. Is the farm large enough to recover and improve its working capital position? Debt structure describes the factors that determine the size of your principal and interest payments. These factors are interest rate, size of debt, the length of the term and the proportion of short-term and long-term debt.”

Examining the three areas of efficiency, scale and debt structure are important in dealing with cash flow stress, says Dehod. “Devote time to examining and preparing financial statements such as a net worth statement and cash flows. If it’s not your strength, get help from your account manager. Remember communication is important. Working with your lenders, and keeping them in the loop will help alleviate the business’s financial stress by finding good solutions.”

For more information:

Contact:
Rick Dehod
780-427-4466
 
 
 
 
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For more information about the content of this document, contact Rick Dehod.
This document is maintained by Ken Blackley.
This information published to the web on June 1, 2017.