Got cash?
These tips can make the most of surplus liquidity, manage cash flow better and keep your management team onside.
As farm management issues go, this is a nice one to have. But that doesn’t make it easy to solve. Many Canadian farms generate substantial amounts of cash, at certain times of the year, beyond immediate working capital needs. What’s the best thing to do?
"The classic situation is of mixed farms that generate streams of cash at different times," says Ted Darling, business risk management specialist with Alberta Agriculture in Airdrie, Alta. "Depending on the time of year, you can get a large amount of cash coming in."
In Darling’s view, the first step is to consider whether this cash is from income (from operations), capital sale (from selling land or machinery), borrowed cash (from a new loan), or personal cash (a cash injection from the owners). This goes a long way to determining how the fresh cash should be handled.
A MEASURED APPROACH TO CASH FLOW
Start with the farm’s cash flow forecast. "Farmers are very good cash flow managers, but in my experience, it’s very often done in their heads," says Darling. "If you’ve never done a written cash flow projection, you’ll be surprised how much it adds to your knowledge of the business."
To make the cash management process more accurate, Darling designed a rolling cash flow forecaster that’s available online. (go to www.agric.gov.ab.ca and search "rolling cash flow forecaster"). He explains that it can forecast cash flows over any span of time, although he believes a 13-month horizon is particularly useful. Structurally, it’s simple. The top half of the spreadsheet is "Cash In" and the bottom half is "Cash Out": Initial setup follows four areas of cash – farm, personal, capital and borrowing – and can be customized to suit individual farms.
By forecasting cash flow, producers will know whether their surplus cash will be needed, how much and by when.
SAFETY AND LIQUIDITY
Suppose you have surplus cash for a four- to six-month period. With interest rates still relatively low, is it worthwhile taking the time to seek a higher return? Darling’s advice is yes, provided both safety and liquidity are assured.
"In past years, rates were high enough that people would park money in interest-bearing vehicles for as little as a few weeks," he says. "Rates today are low, but they’re not insignificant."
Depending on the amount to be invested, there are many safe, fully liquid instruments to consider. Your Farm Finance Specialist can introduce you to a world of options in higher-interest savings accounts, cashable GICs, term deposits, bankers’ acceptances and more. Tax implications should be explored, as well.
Darling offers one final piece of advice for producers who share management responsibilities with family. Having a visible cash flow projection will not only open up short-term interest-earning possibilities, it’ll help keep the peace.
"Surplus cash can be a source of contention within the family, because not everyone understands the business’s obligations six months from now," says Darling. "If you get that cash flow knowledge out of your head, and down on paper, everyone will understand the rationale behind the decision-making."
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