September 12, 2000 FOR RELEASE Sept. 14
Terence L. Day - 509/335-2806 (office)
509/334-1619 (Home)
Coping With Cash Flow With Low Prices
Considering the prices farmers receive for most crops these days, it may be more appropriate to talk about cash trickle than cash flow.
It was only a year and a half ago that Gayle Willett, a Washington State University agricultural economist, was writing a publication, "Managing a Cash Flow Problem: Suggestions for Grain Producers."
At that time Willett noted that cereal grain prices were declining and that growers would need to address cash flow problems. Today the price for white wheat delivered to Portland is about a half a dollar less than it was a year ago and many other commodity prices aren't doing very well either.
The basics of what Willett wrote for grain producers are broad principles that apply to other types of farming as well.
Fundamentally, we might view the cash flow problem as two spigots. Cash flows into the operation through one spigot and out through the other. Producers can't stay long in the business when the income spigot is trickling and the spigot that controls expenses is flowing.
Willett, who now is retired, cautions farmers against shortening their planning horizon when they are experiencing cash flow problems. By focusing on making it through the next month or year, Willett says farmers operate on a crisis-to-crisis basis.
Some current problems are caused by the lack of, or failure of, long-range planning.
Willett says long-range planning may reveal the need to make fundamental operational changes. However, Willett notes that failure to deal with short-term cash flow problems could spell disaster for the operation. In other words, producers have to keep one eye on short-term problems and the other on long-term solutions.
That may seem a bit cockeyed, but successful operators learn how to do it.
Willett's bulletin gives advice on important steps towards managing today's cash-flow crisis.
- Prepare an up-to-date and accurate balance sheet. "Many cash-flow management strategies will be based on information provided by the balance sheet," Willett says.
- Prepare a monthly cash-flow projection for the coming year. Doing so will provide insights into causes of problems and suggest solutions.
- Work closely with lenders and use standard financial tools to communicate with them about your credit needs.
- Cash-flow problems can be caused by improperly structured debt, as well as by too much debt. If lenders can be convinced that the cash-flow problem is a temporary one, they likely will allow operators to reduce cash-flow by extending loans.
- If operators have enough collateral to cover unpaid principal, their lender may allow them to pay interest only during a cash-flow bind.
- Review production practices for areas where profits can be improved by reducing expenses. Willett suggests a look at soil fertility, pest control and tillage systems expenses.
- Give financial management a higher priority. I'm just guessing that most producers would rather be out in the field or in the shop than wrestling a spreadsheet, but the business and finance end of the operation is just as vital as what happens in the field or with the equipment.
- Make more time to aggressively pursue risk-management strategies. "In this era of widely fluctuating commodity prices and a substantially lower government safety net, effective risk management has become very important," Willett wrote.
You might want to start with a visit to the Web page of the WSU Cooperative Extension Department of Agricultural Economics. The URL is http://farm.mngt.wsu.edu/. From there, select OnLine Publications and look for the publication by title.
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