Everyone in agriculture has either managed a cash crunch or will eventually deal with one.
Jodi Gauker, Extension educator, business development at Penn State, defines a cash flow crunch as the result of insufficient money in an account to pay bills. “Some may have the philosophy that if there’s money in the account, it’s there to spend,” she said. “That isn’t a great philosophy for a business.”
Cash crunches can be the result of customers making make late payments, a business experiencing lower than projected sales, bookkeeping that isn’t up to date or unexpected events such as extreme weather.
Businesses should strive to avoid cash flow crunches. “Businesses that don’t manage cash go out of business,” said Gauker. “Over 80% of businesses that go out of business do so because they didn’t manage their cash appropriately. There are good and bad times, and we must manage cash in good times so it’s in the bank.”
The business’s balance sheet should be updated regularly – at least quarterly. Gauker recommended business owners evaluate their current ratio, which is current assets divided by current liabilities.
“That number should be above two,” she said. “For every $1 of expenses, you have $2 of assets to pay off the liability.”
For businesses that find themselves in a cash crunch, Gauker suggested starting by pursuing the low-hanging fruit first. “There’s a trend toward low- or no-spend months,” she said. “You might still have expenses to pay but you aren’t purchasing anything extra. Reward timely customer payments with a discount. Request discounts from vendors on items you purchase frequently, or work with other farmers to get a quantity discount.”
Businesses can also pursue paying interest only or making smaller payments to a lender.
“Reevaluate pricing,” said Gauker. “Some people have had the same pricing year after year and are afraid to change it because they’re afraid their customers will go somewhere else. If you raise your price by $1, you may sell less product but you’ll make up the profit with the increase.”
Gauker suggested producers analyze cash flow statements at least annually. “Look at where you’re spending money, what you’re spending it on and whether you can make any cuts,” she said. “I also encourage people to evaluate ‘right people, right places.’ Are employees in the best place they can be? Do they have the training they need? Are they efficient? Labor is usually the number one cost, so make sure you’re training employees for the skills they need to be efficient.”
Business owners that don’t have an emergency fund for themselves or their business should start one. It can be cash, a high-yield savings account or a pre-paid credit card to put aside.
“Most business owners will dive into their personal bank account to pay bills when they’re in a cash crunch situation,” said Gauker. “That’s good until you run out of emergency funds and you can’t pay yourself and you get yourself into a personal cash crunch situation. The key to an emergency fund is making regular, consistent contributions to it. Something is better than nothing.”
Small business financing options may be an option if cash isn’t available through other means. “Explore credit cards but watch interest rates,” said Gauker. “Obtain a line of credit from a bank, a term loan or a traditional business loan. With a term loan, you’ll make quarterly payments or one payment at the end of the season. The key is to make sure the lender knows what you can handle.”
The five Cs of credit – character, capacity, capital, collateral and conditions – dictate how a lender will determine whether to offer a loan. “Character is your experience, credit history, community involvement,” said Gauker. “Capacity is cash flow – can you make payments? Capital is how much money you’re bringing into the business. Collateral is assets. Conditions include interest rate, length of loan and when you pay.”
In some cases, banks will extend credit to businesses with low cash flow if the applicant has good character, good experience and community involvement. Raising capital through various organizations such as the Small Business Administration or USDA-FSA is an option for some.
“Wishful fundraising” includes grants, funding through venture capitalists or through pitch competitions. Crowdfunding options such as Kickstarter and GoFundMe may work if the applicant has plenty of connections who are willing to donate.
Communicating financial needs begins with a relationship with a lender. “The best time to find a lender is when you don’t need them,” said Gauker. “They can get to know you, your business, what sets you apart. Build the character they’re going to decide on.”
She reminded farmers that not all lenders are familiar with agriculture, so it’s important to work with an ag lender if possible.
“Be prepared and have an updated business plan,” said Gauker. “Write a business plan during good times and before you need financing. The lender will want a three- to five-year cash flow projection – how and when money will come in. They’ll also want at least three years of past tax returns.”
She outlined the five aspects of a business plan, beginning with an overview highlighting what the business does. The management and operations section explains products, selling, pricing and who operates the business side of the operation. Marketing describes how customers find you, who the competition is and how you are different. The financial section includes a cash flow projection, a balance sheet that lists assets and liabilities and how much of the business you own. The business advisor segment names the accountant, attorney, insurer and any other consultants.
Lenders and investors will want to know operational details including how the business got into a cash crunch and plans for moving forward. “They also want to know about your financial projections,” said Gauker. “Are you adding a new product? Downsizing? And when money is coming in?”
Operational pricing changes shows how you plan to get out of a cash crunch situation. The lender will want to know if you intend to change pricing, how the business sets itself apart and whether you have a succession plan.
“It’s important to know your numbers as a business owner and for communicating your needs to a lender,” said Gauker. “You should be checking cash flow availability. Good business owners check and update cash flow monthly. You should have a projected cash flow and update it with actuals. If you do that regularly, you will likely avoid a cash crunch situation because you see it coming and can make changes based on that information.”
by Sally Colby
