By Julia Shanks

Few industries have greater cash flow seasonality than farming. January through April cash flies out the door as you purchase seeds and soil amendments, equipment and tools, and pay staff to prepare the fields for the growing season. On many farms it’s not until May when the cash begins to trickle in, and the full throttle cash flow doesn’t really begin until July. Without proper planning these wild swings in cash flow can bury even the most talented grower. After all, good farming skill doesn’t guarantee good business skills.

Ever resourceful, farmers have developed mechanisms to deal with the cash cycle. They sell CSA shares in the winter to finance the beginning of the season. They build high tunnels and greenhouses to extend the growing season, and grow winter storage crops – both of which provide crops (and cash!!) during the typically slow season. And they open up lines of credit at the bank to get cash before the growing season kicks into high gear.

Nonetheless, some farmers get themselves into a cash crunch. This happens most often when they don’t have a budget (cash flow plan) for the year. A farmer sees money in the bank, and spends it without forethought as to how long that cash needs to last. This cash can be savings from the previous season, or money that should have been set aside for taxes. If the cash runs out before the harvest kicks in, then they may run up their credit card without a plan to pay it back. This can start a particularly vicious cycle because the banks charge fees and high interest rates on unpaid balances.

This cycle can lead farmers into a hole of debt if they’re not paying attention…and suddenly (though it doesn’t really happen suddenly), they find their bank accounts empty and credit cards maxed out. Vendors are banging at the door demanding to be paid. It’s a scary place to be. If you’re reading this now, and this resonates with you, you may be on the verge of a cash crisis. While the long-term goal is to understand how to manage your business to never get in the hole, there is no future if you can’t manage the current situation and get out of cash-crisis mode. It is possible to get out of this hole.

So what can you do to get yourself out of the hole, and stay out? This article was inspired by the insights of Denise Chew, principal of Loupe Consulting. Denise shared with me her father’s “Three rules of the hole:” quit digging, keep the dogs at bay, and climb out. After some reflection, I added a fourth:

Quit digging
In other words, don’t incur unnecessary or excessive expenses. Manage cash as if it were oxygen for a patient on life support.

Identify your biggest expenses and manage them tightly. For most of my clients, it’s labor, small equipment and seeds. Look at your labor schedule – do you really need all the staff working as many hours as they are? Are some employees racking up overtime? Look carefully at where you spend money and make sure every dollar is carefully utilized.

Figure out what systems you need to put in place in order to be sure these expenses are managed tightly. Create a budget for each day, week and month to decide what you can afford to spend money on.

Keep the dogs at bay
Manage and communicate with your vendors about payment plans to keep your supply chain open. Often times, explaining the situation to your vendors can be enough to buy you some time. If they know you have a plan in place, they will be more likely to work with you. Put together a list of payables (who you owe money), and clarify the priority in which they need to be paid. You should prioritize according to the following:

Ensure that you can continue to run your farm operation. If you can’t buy seeds then you can’t grow veggies to sell. If you don’t buy fuel, then you can’t drive to the farmers’ market.

Minimize interest/late payment expenses. Credit card companies have more strict payment policies, whereas, other vendors won’t. Managing late payment fees will also help you to quit digging (see rule #1).

Understand and leverage your relationships with your vendors: are some vendors more flexible than others? Do you have good relationships that you can utilize to help stretch your payment terms for the time being?

Climb out
The fastest way to climb out of the hole is to increase the money coming in, i.e. revenue. Focus on growing sales and actively sell, sell, sell. Sell storage crops, sell CSA shares, sell seedlings… Solicit ideas from your crew. What systems do you need to put in place to help team members (and you, the business owner) sell?

Get your head out of the sand
Too often, when farmers get deep in the hole, they panic and start to ignore the realities of their situation. It is indeed possible to manage the hole and get out, but you must accept what’s going on and be proactive.

When you finally do get out of the hole, don’t go back to your old ways. Continue to use the systems and controls that you have put in place so that it’s less likely that you’ll fall into this situation again.

Here are 10 ways you can protect yourself from getting in a hole of debt in the first place. As you read these tips you’ll notice a few themes:

• Just because there’s money in the bank doesn’t mean it’s yours to spend.
  
• Understand where your money is going so you know how and when to cut back.
  
• Understand the model and cycles of your business.

1) Have an effective bookkeeping system so you understand where your money is coming and going. In order to manage cash flow, you must have an effective way of logging each and every cash inflow and outflow, and classifying it according to a system that makes sense to you and allows you to extract the information you need. Creating a detailed “paper trail” when the transactions occur is the only way you will realistically be able to aggregate and analyze the data effectively. QuickBooks is the most efficient tool for managing your bookkeeping.

2) Understand the root of your cash flow issues before it becomes a crisis. If you ever start feeling like your cash buffer isn’t as high as you need to be comfortable, do some digging in your financial records to figure it out before “stuff” really hits the fan, and you can’t make payroll, for example. Here are a few common reasons why your cash flow may be suffering:

• Customers don’t pay on time (see #7)
  
• Poor planning for the slow season. (see #5)
  
• You have more debt than the business can sustain. (see #3 and #10)
  
• You’ve let your expenses creep up (see #4, #6 and #9)

3) Don’t borrow against payroll or sales tax. Every day you’re collecting sales tax from your customers. And every two weeks you’re deducting money from your employees’ paychecks to cover both employee and employer contributions of payroll taxes. This money can hang out in your checking account for several weeks before it’s remitted to the government. Just because the money is in your account, doesn’t mean it’s yours! It belongs to the government and you’re just the messenger. If you’re spending this money, you are essentially financing your business through a government tax loan. To avoid this situation:

Have clear Taxes Payable accounts (sales tax, payroll tax) set up in your bookkeeping system and use them each time you log daily sales and payroll. When you look at your checking account make a mental note to deduct the amount of payables.

Even better, open a separate bank account to set aside the pass-through taxes. If you don’t see it in your checking account then there’s less temptation to spend it.

4) Understand your profit model and what it takes to break-even. I’ve been working with a client whose business is not yet profitable, and she has borrowed money from friends and family to stay afloat. The challenge is she doesn’t know where she needs to make changes because she doesn’t understand the profit model of her business. That is, what does she need to do to be profitable? Is it because her expenses are too high or revenues are too low? While the answer to both questions is likely “yes,” there are defined, targeted goals that she needs to achieve. It’s not just: “increase sales,” it’s increase sales to $XXX. It’s not just, “reduce expenses,” it’s reduce expenses to XX% of revenue. What are the target sales you need to cover your fixed costs like rent and insurance? What is the maximum you can spend on your variable costs like seeds and fertilizer? In order to stay profitable, and maintain good cash flow, you need to understand the benchmarks of revenue and expenses for your business.

5) Know when your slow periods are and have a cash plan. All businesses face a slow period during certain times of the year. Crops stop producing with the autumn’s first frost, and farmers will see a dip in cash flow from November until March when CSA subscribers start sending in checks. This can be a scary time if you haven’t planned for the period of low cash inflow; after all, the rent (and other expenses) still needs to be paid. When you have a period of good sales and cash, be sure to squirrel some away for the low periods. If you have a cash flow plan then you know how much extra cash you’ll need to cover the slow times.

6) Have a budget, and compare actuals to projections. A budget for how much and when you expect to spend money and bring in revenues (like suggested in #5) is a great tool to make sure you stay cash positive. But projections can feel like “fairy dust” if you only look back at them once a year to see how close (or how far off) you were. Throughout the year, review your projections and make adjustments. If you see that expenses are higher than anticipated, then you’ll need to cut back in the coming months to stay on track. If your revenue is better than anticipated, then perhaps you can make the capital improvements that you had otherwise delayed. Further, adjusting your budget for the coming year according to your historical revenues and expenses will help you home in on the realities of your business’ cash flow and can help you avoid a cash crisis.

7) Manage your Accounts Receivable. Accounts Receivable (or “A/R”, money that your customers owe you) can turn into a cash crisis quickly if not managed effectively. They are easy to forget about when managing day-to-day operations; you know you have made the sale, and you delivered the product. But if you don’t have a clear policy in place of when payment of invoices to your customers are due or if you don’t invoice your clients on time, the actual payments can come trickling in more slowly than you expect, or not at all. If you have customers that consistently don’t pay their invoices on time, it’s completely reasonable to stop doing business with them. After all, it could mean the difference between you being cash solvent or in the hole.

8) Always look for ways to reduce expenses and increase revenue. Perhaps this one is an obvious Business 101 lesson, but it’s not always easy to think outside of the box when you are in a flow with respect to your business operations. Having trusted advisors that can help you identify potential areas of expense reduction and revenue enhancement can be a valuable way to keep your cash flow in a healthy positive state at all times.

9) Understand what it really costs you to grow your products, and price them accordingly. We’ve talked about how to price your products based on your cost of production and competitive analysis (see my article in the October 2016 issue of Growing for Market). But if your cash flow is still suffering there are a few more things to consider:
How much do you waste? A sad reality is that everything you grow will not get sold, and some of it will end up in the compost bin. Factor in your “shrink” when setting your prices.
Are you paying a sales commission? While this can drum up sales, it also eats into profits.
Have you factored in the cost of packaging and shipping?

10) Never borrow money if you can’t afford the monthly payments. Borrowing money isn’t a bad thing. Often it’s the most efficient way to grow your business. But before you borrow money, make sure you can afford pay it back (both the principle and interest) through the profits of the growing operations of your business.
In order to stay in business, doing what you love, you must insure that you stay financially solvent.  Having a cash flow plan is the best way to understand how the money comes in and out of your business, and ensure that you stay flush!

This article is adapted from Julia’s book The Farmer’s Office, available from Growing for Market. Visit Julia’s website (juliashanks.com) for more articles, tools and tips. She works with food and agricultural entrepreneurs to help them achieve financial and operational sustainability. She provides technical assistance and business coaching that enables them to launch, stabilize and grow their ventures. She is a frequent lecturer on sustainable food systems, accounting and small business management.