CASH FLOW MANAGEMENT How much financing will your farm business require this year?

When will money be needed and from where will it come? A little advance planning can help avoid short-term cash shortages. Cash transactions occur frequently on the farm. An important management task is to control this flow of cash in and out of the farm business. This article serves to highlight the concepts of liquidity and cash flow planning and discusses ideas for improving your farm cash flow performance. Liquidity deals with the ability of your farm to generate enough cash to meet financial obligations as they become due without disrupting the normal operations of the farm business. Cash inflows are used to meet financial obligations like production expenses, capital expenditures, loan payments and family living expenses. Inflows and outflows are rarely at par thus a liquidity reserve must be managed to prevent cash shortages. Main cash inflows are as follows: Crop, Livestock and Livestock Product Sales- these form the primary source of cash for your farm business and are critical to maintaining the liquidity reserves. Some enterprises like dairy or poultry layers generate a relatively even flow of cash over the production year while other enterprises result in sporadic cash inflows as sales are seasonal, for example tobacco has a long cash cycle. The farmer starts spending on 1 June to prepare for irrigated seedbeds but the farm cash inflow are likely to be realized at the end of April or early May of the next year(10-11 months). Other Farm Receipts- they can constitute a substantial cash inflow to your farm business and include profits from farm bar and farm shop. Nonfarm Receipts- includes income from off farm jobs, cash infusion from nonfarm savings and investments, interest earned on nonfarm investments and capital provided by outside investors. Sale of Capital Assets- includes sporadic cash inflows from the sale of farm assets, machinery, breeding livestock and tools. Equity Injection by Shareholders- The owners of the farm can also inject their own funds into the farm business. This must provide the seed capital for the farm business. Borrowed Money- money that comes from the side. It is a residual source of cash used to maintain liquidity reserves when outflows sometimes exceed the sometimes sporadic inflows of the 5 sources mentioned above. They include short term loans for operating costs, medium term loans for assets like machinery or long term loans to finance assets acquisitions and capital

developments at the farm. When the farmer borrows money the money comes with additional burden in the form of interest. The interest per annum varies from bank to bank but the range for commercial loans is 5% to 10% per annum plus other bank charges between 5% to 10% of the loan. Most financiers require security for the loan, preferably fixed property like land and buildings. The farmer should ensure that the tenor of the loan synchronizes or ties up with the cash flows from the crop financed so that the proceeds are used to retire the debt.

Cash outflows include the following: Production Expenses- constitute a relatively large draw on cash reserves and include seed, fertilizer, chemicals, labour and repairs & maintenance. If you fail to meet these expenses farm production will deteriorate or you incur higher interests on borrowed money. Capital Expenditures- include cash outlay for replacing and adding machinery and breeding livestock and purchase of land and buildings. These are important to increase business growth. They are sporadic and often involve large amounts of money thus there is need for careful planning to ensure that these are met. Loan Payments- these can be paid when they fall due therefore there is need to consider this fact when formulating your loan payment schedules. Family Living Expenses- they are sometimes overlooked as being secondary but money earmarked for farm operations sometimes finds its way into the family budget. The farmer should budget for family expenses in the form of a salary so that there is separation between farm cash and personal cash flows.

One useful tool for planning purposes is a Cash Flow Budget which is an estimate of all cash receipts and cash expenditures that are expected to occur during a certain time period. Estimates can be made monthly, quarterly or bi annually. Cash flow budgeting only looks at money movement though not at net income or profitability. A proforma cash budget is illustrated below: A cash flow budget is useful because it: i. Forces you to think through your farming plans for the year.

ii. iii. iv. v. vi.

Helps the farm to check whether income realized from various activities will meet cash needs of the farm. Projects how much credit financing you will need and when. Projects when loans will be repaid. Provides a guide against which you can compare your actual cash flows. Helps you communicate your farming plans and credit needs to your lender.

As the year progresses you have to fill out an actual cash flow statement. This actual statement can then be compared to the budget so as to improve the management of the farm. Thus the actual cash flow statement can be used to project next years cash flows. By doing this the farmer is able to know his/her cash reserves and will not be surprised by cash shortfalls. The farmer then makes a plan to cover the shortfall on time so that operations are not disrupted. The importance of farm cash flow statements cannot therefore be overemphasized. The numbers are used to assess the state of agricultural industry and to form the basis of various policy options. Not every farmer is an expert in preparing cash flow plans. The money invested in farming is sizeable. The farmer can engage financial consultants who can assist with preparation of cash flow plans and can also help in preparing submissions to the banks. (The writer Ricky Muzangaza is a senior consultant in the Fairvalue Agri Finance Division and is contactable on 0913 399 358/ 011 531 472; 04-781 348/9 or fvalue@zol.co.zw/fvalue@mweb.co.zw)