As we close a very trying year in agriculture with 2019 weather and market challenges, the question going into 2020 is will it cash flow?
It is becoming very important to have an accurate cash flow statement from the farm management standpoint and base management decisions on your projections. Once a cash flow projection has been completed for the year it should become a goal list as well as a working document that can be compared to your actual income and expenses. Instead of filing that cash flow in some obscure location, keep it available during the year.
As you are aware, it is difficult to estimate crop prices and yields six months from now, and the livestock sector is just as challenging. Nevertheless, the cash flow provides an indication of how much working capital is needed to sustain your operation. Depending on when your major sources of revenue are realized, I would highly suggest “penciling-in” the actual results and compare them to your projections. As the year unfolds, having this information readily available may help you adjust your marketing decisions as well as capital purchases.
Most lenders and producers tend to be fairly conservative on the income side, so there may be some extra cushion if you have been able to exceed the early projections. On the flip side, if revenue is not meeting expectations then it is better to be aware of this situation rather than ignore it.
Hopefully, you were a little generous on the expense side of the ledger when compiling your projections. As for crop input estimates, I think the best time to re-visit your numbers is sometime around mid-June. By then, planted acres have been finalized and most of the costs have been incurred. This timeline will also provide an opportunity to refigure break-evens ahead of the USDA Quarterly Stocks and Planted Acreage report, both of which have a tendency to provide some big swings in commodity prices.
Having a good knowledge on production expenses is an important part of controlling costs in an environment of tight margins. Overhead costs are a little more difficult to trim, but it is relatively easy to track year-to-date expenditures and compare them to projections. These same tracking methods need to be used by livestock producers especially, since there are no built-in safety nets such as crop insurance and farm program payments.
Lastly, if you are regularly tracking family living expenses, it is easy to determine if you are sticking to your budget. I realize it may not be practical to check this every month, but it would be a good idea to take a good look on a quarterly basis. This will allow you to adjust spending money in one area if there are unforeseen problems appearing in another.
So, the first step is to prepare a 2020 cash flow projection and be ready to update it as needed. This is no time to bury your head in sand. If you haven’t devoted much time to understanding your financial condition, now would be a great time to enroll in our program. Contact me at either 605-350-4132 or Blaine.Carey@mitchelltech.edu if you would like more information about the South Dakota Center for Farm and Ranch Management.