Editor’s note: The following was written by Jack Davis, South Dakota State University Extension crops business management field specialist, and Heather Gessner, livestock business management field specialist, for the SDSU Extension website.
The 2020 vision for the farm business has become cloudy as we have moved into the first quarter of the year. But strong business management skills and systems do not go out of style in times of uncertainty. These skills will help the business work through this downturn in commodity prices.
Cash flow budget accuracy is critical in developing and controlling the business. A four-year study of borrowers showed they over-estimated revenues by 15% on average and underestimated expenses by 17%, resulting in a 300% error in net cash flow.
In order to increase this accuracy, businesses need to regularly monitor cash flow and use it to control cost and set selling targets.
A strong practice is to keep a rolling 18-month cash flow and use this to control and adjust operations as needed. One method is to do this by quarter. Quarterly, compare budget to actual using the variances to make adjustments in forecasting and/or controlling of expenses, buying opportunities, selling targets, and then adding on the new quarter to keep the 18-month cash flow in place.
This may have to be done monthly under increased uncertainty and as situations or information changes.
Use current outlook, knowledge, experience, historical records and best judgment. Avoid irrational fear and exuberance. Use a short- and long-term view along with evaluating and using risk mitigation.
Analysis includes holding a quarterly or systematic debriefing on results of key decisions and analyzing what went well and or poorly. Determine why it turned out as it did, what was good/bad, what could/should have been different, any adjustments required, risk mitigation needs, and leading indicators.
The debriefing helps create team communication and aids in successor development. It is important to keep notes, written minutes, action plans, assigned responsibilities and timetables.
Keep in mind during these volatile times that strong business management skills are in style and will help you work through this.
Below is a checklist of items to do.
- Know your numbers: Understand what is making you money and what is not. Compare your financial ratios and expenses.
- Price risk protection: Market on your margins, locking in profits when available.
- Adapt conservation practices: Check on conservation programs through NRCS.
- Reduce direct costs: Spend management time on top direct costs fertilizer and seed costs. Lower input costs without cutting yield. Work to lower the top four to five expenses by 5-10%.
- Cash rent. It may not be prudent to continue sustaining losses on high cash rent farms.
- Capital purchases. Invest in operational efficiency and excellence. May need to reduce capital purchases.