Five ways to improve your cash flow
Managing a cash squeeze is a challenge for many agribusinesses, especially when faced with unforeseen circumstances, such as natural disasters, injury or even a fleet of late payers. Read our five-point strategy for healthy cash flow management.
While some agribusinesses in Australia are experiencing record profits, others are grappling with restricted cash flow following a decade-long drought, increasing input costs, a slump in production, rising foreign competition and extreme weather. Whatever the circumstances, fully understanding your cash flow cycle – and potential blowouts – is essential.
The top five
Jason Lipp, NAB Regional Agribusiness Manager, outlines five key areas to help reduce your exposure to a cash squeeze:
1. Identify your top three expenses
Know your budget limits. Use a cash flow forecast to pinpoint your top three expenses. Then forecast out with a variety of cash flow scenarios to see the impact changes will have on your cash levels. For example, how would an increase in feed costs affect your bottom line? Put your business in a variety of ‘what if?’ settings. Plan for both worst and best case scenarios. No matter if you’re a cropper or a livestock producer, in agribusiness you need to sensitise your cash flow.
Think short, medium and long term when devising a forecast. Should you hold off on buying new machinery or lease it? Your approach should always be predicated by rational, calculated and informed risk taking. Always know how readily you can access short-term credit and/or cash.
2. Forecast using cash flow averages
Using average income and expenses is a safer prediction mechanism than using current pricing, particularly for income. By using averages to plan, you’ll be in a better position to cope with unexpected cash pressures.
3. Activate a detailed price plan
Every day, agricultural producers face a price risk, whether buying diesel, machinery or livestock feed, negotiating when to sell their stock or when to have their crops harvested. Since prices fluctuate constantly, hedging and swap options can help reduce exposure to fluctuating prices.
Use hedging tools to prevent a drag on profitability. Ascertain if you’re in a position to hedge, ensuring the costs of hedging don’t exceed anticipated outcomes – the function of hedging is to reduce risk, not to make a profit.
By hedging a portion of your crop early, you may be in a better position to plan ahead. Also, teaming up with other agribusiness producers and group buying some of your input products (such as fertiliser or farm equipment) may make you eligible to receive a discount through economies of scale. Engage a third party to assist with this – for example, a rural consultant.
4. Seek outside help
Regularly talk to your banker for value added advice. Most agribusiness operators are good business people – they’re financially astute and understand cash flow. But a key challenge is to adjust expectations and cash flow forecasts when events don’t go according to plan. Each case is different. You need to sit down with your banker or adviser and explore a budget tailored to your business needs, maybe even considering the addition of off-farm investments immune to production cycle outcomes.
If you’re a primary producer with short-term debt due to fluctuations in earnings triggered by economic and seasonal variations, consider restructuring the debt. One way to do this is with a farm management deposit, which is a fixed rate, fixed term investment providing concessional tax treatment.
5. Review your cash flow forecast for every production cycle
Conduct a monthly, quarterly or, at minimum, half-yearly internal cash review of your agribusiness.