News & Information, AgBio Communications Unit, Cooperative Extension Service, South Dakota State University
For Release: July 30, 2002

Improve Liquidity and Cash Flow

BROOKINGS, S.D. -- Farmers and ranchers facing drought still can take steps to improve liquidity and cash flow, a South Dakota State University specialist said.

"It is tough to manage through drought and the only real solution is a return to normal rainfall," SDSU Extension Management Specialist Jack Davis said.  "In a drought situation, you do not know when that will come, so as owners and managers you have to take a proactive stance and evaluate your options."

Some key items to look at are:

When evaluating your options, the key is communication and planning to evaluate the alternatives and find the best path to survive through this weather crisis.  The planning starts with the chief executive officer and the board of directors.  The chief executive officer may be your dad and the board of directors might be mom and the rest of the family.  Whoever they are in your business, they have the responsibility to give direction.  The stakeholders must be in agreement, Davis said.

Use your problem solving skills to help you through this drought by: listing all possible solutions, evaluating the top four solutions, choosing the best or a combination of the top solutions, identifying positive specific action you can take toward a solution, and identifying the time period to take action.

As a starting point, consider the items listed below to help increase liquidity and improve cash flow.  These items do not cover all possibilities, but can be used to help generate ideas that will fit your operation.
* Decrease capital purchases.
* Make sure capital purchases are financed properly using term loans.  Do not be tempted in good years to make capital purchases out of cash flow using operating notes.
* A one-time option may be to restructure debt.  When analyzing financial statements, Davis typically finds that there is room to restructure current liabilities against intermediate assets, such as machinery or breeding stock.
* If producers have sufficient equity in intermediate and long-term assets to protect the collateral position of their lender, they may be able to negotiate an interest-only payment during this down year.
* Calculate each expense category as a percent of gross sales, by using the tax return from last year or current cash flow.  This shows what was used to generate each dollar of sales.  Control those expenses that are the highest percentage, this is where the most opportunity for controlling costs lies.
* Become stricter in your culling standards of livestock and machinery.  Cull unproductive livestock and seldom-used equipment.  View each piece of equipment and be objective to whether it is needed.
* Livestock producers should weigh the additional costs of keeping the breeding herd against the value that they will produce and also how much risk they can bear.
* Work with a lender to create notes for raised breeding livestock as though they were purchased.  By creating the note, you have reversed the cash flow and it results in the note being paid back over time.  This will match the cash flow that is generated from future sales of offspring.
* Consider custom hire to utilize your equipment.
* Can you increase your net income by more intensive management?  Dairy producers calculate the net income increase if you were to increase your rolling herd average by 1,000 pounds per cow.  For cow/calf operators: how is cash flow affected if you cull your bottom 25 percent and replace them with average or above average producing cows?
* Review your marketing program by taking into account higher prices and reduced production and work the program.
* Determine maximum economic yield for each of the various soil types for your farming operation and fertilize for the yield.
* Consider sharing machinery with your neighbor to spread the fixed costs of your large equipment investment over a larger number of acres.
* Utilize competitive bids for purchases above a certain dollar amount like $500 or $1,000.  Make sure you are aware of the specifications of the product.  A lot of this work can be done during the winter season.

"The main thing is to plan early for how your operation will handle the reduced production due to weather," Davis said.
More information on drought can be found at the SDSU drought Web site, http://sdces.sdstate.edu/drought/.

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Contact: Jack Davis, (605) 256-4151
** For links to other sites showcasing SDSU's work in teaching, research, and Extension, visit http://sdces.sdstate.edu.

Lance Nixon, Editor
AgBio Communications Unit
South Dakota State University
ACC, Box 2231, Rm 200
Brookings, SD 57007
Telephone: (605) 688-4653
Lance_Nixon@sdstate.edu