Source: FCC
From calving to marketing, beef production is a demanding business with perennially tight margins. To ensure you make the most of your operation from a financial perspective, a cash flow statement is critical to your success as it shows how your operation performs.
No two beef operations are the same, so use a cash flow statement to point you to where you need to focus your management. It’s a good starting point to identify areas where your business can improve and help to evaluate major decisions – from participation in risk management programs to major capital investments.
Cash flow statements can be especially helpful when discussing business with your advisors and partners, such as your accountant.
FCC’s Aaron Backman, a senior loans analyst, and Nathan Janzen, a senior relationship manager, offer these four reasons every beef producer should have cash flow statements.
1. One large payout a year
It’s not the case with all beef producers, but when you market your animals in the fall, payment often must be stretched for the next 12 months.
Backman recommends working with your lender to ensure that major payments occur as close to your anticipated sale dates as reasonably possible to minimize interest payments. Also, understand your approximate yearly expenses to choose better what to spend cash on.
If cash is tight, contact your lender early. Options include having the right credit line or adjusting payment dates to match cash flow.
What is the plan to effectively manage that money?
- Know your numbers to understand if purchases and expenses make sense
- Review your annual financial plan every three to six months to ensure you are still on track and able to make all your purchases and pay your bills
- Try to minimize the use of working capital borrowed or operating cash to a certain extent
If you sell in the fall but your payments are set for spring, money must be managed effectively.
2. Capital investment evaluations
Just because prices are up now doesn’t mean the next month will be as rosy. Many producers lived through prolonged price shocks during the pandemic, a strong reminder to be on top of money coming in and out of the ranch and employ conservative financial planning.
When making a capital investment decision, such as increasing herd size, upgrading equipment, or buying land, consider whether the purchase would make sense if cattle prices dropped, explains Janzen. This helps focus on understanding the risks you’re taking and the possible shortfalls that could occur. Janzen encourages producers to spend a few days every year digging into their numbers and using realistic cow-calf projections in their cash flow planning.
3. Risk management decisions
A tractor at an auction may be a great deal, but how many calves do you have to sell out of your bottom line to rationalize that purchase.
If cash flow projections show a tight year, price insurance tools may make more sense, or securing feed supplies earlier in the growing season may become more important.
Conversely, more options for taking risks may exist if your cash position is strong.
All decisions you make ultimately have an impact on cash flow. Can you absorb those impacts? Only a cash flow statement can tell you that, Backman says.
For example, a $50,000 tractor at an auction may be a great deal, but did you run the numbers? If you break the cost down over the number of heads you run, how many calves do you have to sell out of your bottom line to rationalize that purchase?
Know the numbers before you make any important decision.
4. Find and balance opportunity
Cash flow projections provide insights into more than just expenses. Although expenses are easier to track, remember the revenue part, such as how reduced death loss or increased calf weights will improve cash flow. Janzen says statements identify opportunities, noting how it’s important to balance revenue and expense impacts when looking at them.
Cash flow/income projections can be a powerful tool for your farm, but they must be as realistic as possible to be effective. Consider different “what if” scenarios to identify challenges earlier when more options are available and provide support and confidence in your decisions.
Article by: Trevor Bacque
