Managing cash flow when illness strikes

3 min read

No one can predict how or when illness can strike. But as business owners, how you prepare for possible impact could make a difference in how the farm endures

Cash flow on the farm may be restricted

And faced with the possibility of restricted sales, curbed marketing and reduced staff due to the spread of coronavirus, cash flow on the farm may be restricted.

Cash flow is an estimate of all cash receipts and expenses expected for a certain amount of time – all the money coming in and going out of the farm. Some farms do monthly calculations, while others prefer bi-monthly or quarterly. Here’s a month-by-month sample from the FCC Cash Flow Planning Guide.

Create a budget

It’s helpful to review your cash flow statement when building a cash flow budget. A cash flow budget projects future expenses, while a statement is a record of past expenses.

While cash flow items like loan repayments and utility bills are predictable, matters like disease outbreaks or opportunities like new land coming up for sale can often appear out of nowhere.

Despite the unknowns and uncertainties, cash flow planning is the only way to anticipate shortfalls and take appropriate action in advance.

Benefits of cash flow planning and analysis

Know when cash flow will be tight to plan for shortfalls
Identify the best loan term and repayment schedule
Make marketing decisions that are not under cash shortfall constraints
Analyze if interest rates rise or commodity prices drop (sensitivity analysis)
Help to decide whether to lease or buy a major piece of equipment

Tighten spending

If the effects of illness impact an operation’s cash flow, there are ways to tighten finances close-at-hand.

Start with reorganizing debt to make payments more manageable and review high-interest loans says Carol Kruck, BDO senior accountant.

“With interest rates much higher on credit card debt, can you roll it into a bank loan instead?”

She advises going through credit card statements line-by-line, so farmers know exactly where every dollar is spent.

Kruck also recommends reviewing inventory and unproductive assets and, if possible, sales made.

“Do you need to rework your marketing plans and sell inventory? Are there unproductive assets you can sell to generate cash flow?”

Set priorities

Sharon Ardron, a Manitoba Agriculture farm management specialist, recommends farmers prioritize and budget business and personal debt obligations in times of financial restrictions. Plans to purchase new equipment may need to be put on hold, she adds.

Instead, farmers may need to consider increasing their repair and maintenance estimates to preserve working capital and reduce debt obligations for the business, Ardron says.

She stresses working capital is critical to a business’s short- and long-term viability, and farmers must identify spending priorities.

Bottom line

Only time will tell when illness can strike, but business owners and farmers need to be prepared, especially when it comes to a possible flux in cash flow. Develop a cash flow budget and look for ways around the farm to tighten spending, like reviewing credit card statements, reorganizing debt and delaying new equipment purchases.

Risk management