Farms and agribusinesses can experience seasonal cash flow disruptions, making cash flow management a never-ending challenge. Cash flow difficulties can be especially acute during the off-season, when cash inflow is restricted.
Poor cash flow management creates two problems: shortages and surpluses of cash. Shortages occur when the farm or agribusiness doesn't have enough cash to pay its bills on time — or at all. Surpluses exist when large amounts of cash inflows remain idle, earning no return.
Good cash flow management means the farm or agribusiness can:
- Pay bills before they're due to capture suppliers' early payment discounts and avoid late-payment charges.
- Put idle cash to work to grow the business or earn interest in deposit accounts.
These benefits can make the farm or agribusiness more profitable.
Good cash flow management can also offer the owner personal benefits, such as helping to reduce stress and uncertainty about their business's financial stability.
With these benefits in mind, here are six ways to improve cash flow management during the off-season, and year-round:
1. Identify cash flow pressure points.
The off-season is an obvious cash-flow concern. But it's not the only potential cash-flow pressure point. Bad weather, global shifts in supply and demand, financial market fluctuations and changes in government regulations can all impact a farm or agribusiness and its cash position. Understanding what puts pressure on cash flow is the first step to easing the squeeze.
2. Apply for a business line of credit.
A business line of credit, or "credit line," is a type of bank financing that can be tapped when cash is needed and paid off when it's not. A credit line can improve cash flow by enabling the farm or agribusiness to take advantage of suppliers' discounts for early or prepayment. These discounts lower the cost of supplies, conserving cash for other purposes. A credit line can also be used for current expenses and to ease cash flow timing issues.
3. Get a business credit card.
Like a credit line, a business credit card provides access to cash when it's needed. Many cards offer benefits such as cash back and points that can be applied toward purchases, airline miles or other travel perks. Cash back can create a cash-flow cushion. Miles can be used to travel to conferences or conventions or meet with out-of-state suppliers.
4. Open a money market savings account.
Money market savings accounts usually pay a higher rate of interest than standard savings accounts. Transferring or "sweeping" surplus cash from a checking account or other non-interest-bearing account into a money market savings account may free up some cash. That cash can be swept into the account automatically and then transferred out when it's needed, such as during the off-season, by phone or online.
5. Purchase deposit certificates.
A bank certificate of deposit, or CD, is a term deposit instrument, which locks up a specific sum for a set period of time in exchange for a higher rate. Like money market savings accounts, CDs can be used to help boost interest income, which can be used to improve cash flow. Short-term CDs have a term of one month, three months, six months or one year. Long-term CD terms can range from 18 months to 10 years. Removing funds from a CD before the end of the term can trigger a penalty, so it's wise to time the end of the term for when the cash will be needed, such as at the season's end or when large bills are due.
6. Start tax planning.
Smart tax planning throughout the year can help to lower a farm or agribusiness's income tax liability. Examples of tax strategies include prepaying expenses, deferring sales receipts and changing how accounts payables are managed. Paying less tax frees up cash, which improves cash flow. Combining tax planning with banking presents opportunities to maximize these benefits.
A conversation with your agricultural banker can help you improve your cash flow management practices. When you meet, bring copies of your financial statements, tax returns, cash flow statements and bank checking account statements. With this information, you and your banker can identify ways to improve your off-season cash flow.