The last 18 months have seen many agricultural commodity prices fall significantly; input prices continue to increase, plant and equipment prices skyrocket and interest rates experience 13 consecutive rate rises.  

In combination, these lower commodity prices, higher costs, and rising interest rates are putting significant pressure on many farm owners’ budgets. Subsequently, leading farm business owners are questioning whether their cashflow position will be sustainable moving forward.  

The challenge is that most commodities are now sitting at, or around, their Decile 5 inflation-adjusted prices, and interest rates are at long-term average levels (that is, we are operating in more normal conditions).  

This means that the most likely scenario is that you need to work out how to set up your farm businesses to be profitable and generate positive cash flow in these kinds of environments, rather than hoping for the “amazing times” of the last few years to return.  

As a farm business owner, managing cash flow is a key skill that will demonstrate your competence…  

And, now more than ever, banks are requiring you to demonstrate that you understand your cash flow position and have a plan for profitability. Otherwise, you may risk losing their support for further finance. 

If your current cash flow is not where you would like it to be then it is likely that your business may be suffering from one or more of the 7 reasons for a lack of cash in your farm business.  

To identify and address these issues, you need to be able to generate a strong cash flow forecast for your business. To learn how to do this you can download our Cash Flow Optimiser pack for just $9. Click here to download it now.  

Let’s dive in.  

1. Underperforming Business Model 

If your business model is not able to generate a 30% Net Profit Ratio (which means that 30% of the income is retained as net profits before paying taxes, capital reinvestment, interest, and lease costs) at average production & Decile 5 (average) prices, then this is the first place to start. A business that is not underpinned by a profitable business model will always struggle for cash.  

Fixing the business profitability must be the first priority and there are many things the savvy farm owner can do to improve their profitability that do not require a large outlay of cash.  

Getting involved with farm business benchmarking is a great way to start; identifying the strengths and weaknesses of your current business model and opportunities for improvement. 

2. Too Much Debt (farming for the bank) 

Even if you have a profitable business model, taking on too much debt in your business can lead to most, or all, of your profit leaving your pocket and going straight to the bank.  

Rather than farming for the life you want, you end up farming for the bank.  

To be sustainable, a farm business needs to maintain a safe equity level (ideally 80-90% equity) and generate a sufficient net profit. There needs to be cash available to pay for the interest costs and leave sufficient money for the owners and capital reinvestment into the business.  

The target here is that your Net Profit should cover your interest costs by 3 times. For a short period of time, your finance cover ratio can safely be at around 1.5 times.  

If you have too much debt in your business, then the focus must be on one or both of the following: 

1. Increase Net Profit 
2. Reduce Interest Cost  

3. Capital Reinvestment Too High (beware of pimping your ride) 

Capital Reinvestment (or CAPEX) is a key part of any farm business. It usually requires the allocation of large amounts of capital that are tied up for long periods of time and may take several seasons, or even decades, for the extra returns or avoided costs to pay for the initial investment.  

Because of this, CAPEX should be carefully considered and any investment decisions prioritised based on those projects that generate the highest Return on Investment and have the shortest payback periods (i.e. the time to return your original investment back to you).  

Careful consideration must also be given to how to fund & finance these investments. If you choose to fund these investments from cash rather than sourcing finance, there can be significant long-term cashflow ramifications for the business.  

It is better to investigate the best funding & financing options available prior to making the investment decision so that you don’t leave yourself in a risky cash position.  

Remember that most CAPEX decisions are discretionary. It is easy for businesses to over-commit themselves to CAPEX that is not essential or has low ROI’s. Capital should flow where it gives you the best risk-adjusted returns and it’s important to weigh up whether you would be wiser investing that money off farm.  

4. Cash Conversion Cycle 

Farming systems typically have a slow cash conversion cycle. The cash conversion cycle is the time in days or months that it takes for the working capital you outlay to be returned to you as a saleable product.  

Let’s take a trading cattle example where you buy steers for a 3-month trade.  

You outlay the cash for the steers at the start of the three months and are bet paid 30 days after they are sold, 3 months later.  

Your cash conversion cycle here is 4 months (3 months for the trade plus 1 month waiting to get paid).  

Compare this to an alternative model where you run agistment cattle and you get paid each week for the animals on hand and outlay none of the direct costs. The cash conversion cycle could be as low as a week.  

The free cash available in these two different business models can be significantly different.  

In other farming models, there are many examples where farmers slow down their cash conversion cycle by choosing not to sell products when they could. Whilst we wouldn’t recommend putting your business into a position where you must sell because of cash flow reasons, being aware of the marketing decisions you make and how they impact your cash conversion cycle can have a huge impact on the cash available in your business.  

It is important to consider both the most profitable marketing strategy as well as the impact on your cash flow.  

Negotiating better payment terms with your suppliers or offering incentives for early payment can also be a great way to shorten your cash conversion cycle.  

Ask yourself this question: What is my average cash conversion cycle and is it as short as it possibly could be?  

5. Growing Broke 

Every business has a sustainable growth rate that it can fund internally before the extra increment of growth sucks up more cash than it generates.  

Due to the large working capital requirements and relatively longer cash conversion cycles for farm businesses, growing farm businesses can experience the impacts of ‘Growing Broke’. This is where they have a profitable business model but all the businesses cash is being sucked up through reinvestment into growth.  

Planning for this growth is important and it is why it can often be wise for farm businesses to consolidate for a couple of seasons after a period of sustained growth.  

 6. Owner’s Drawings 

There are times when we require our businesses to generate more cash flow for us than a commercial rate of labour for the work we contribute to the business (e.g. boarding school fees!).  

This must all come out of after-tax cash flow.  

Developing a capital allocation plan for your business is a great way to plan for these higher cash flow periods and allow you to put money away into compounding investments to help you work towards these goals.  

If your drawings are higher than your business can handle, then you have 2 choices. 

1. Reduce your drawings. 
2. Increase your profits and free cash flow. 

At Farm Owners Academy we encourage you to focus on option 2 by upskilling yourself as a farm business owner and identifying opportunities to restructure your business to support the lifestyle you want, rather than constraining yourself to your current business performance.  

7. Very Bad Season or Prices (below Decile 2) 

Let’s face it.  

Depending on where you farm, at some stage you will experience a very poor season or prices - which may mean you make a loss. 

Part of the skill of a farm business owner is to minimise the loss in these years and to have adequate liquid cash reserves for the farm to be able to continue to operate.  

It is easy to jump to the conclusion that the weather or the prices are responsible for your current cash flow situation.  

However, in our experience it is more common that the combination of issues 1 to 6 are the main contributors to farm business owners struggling with cash flow.  

Be curious about the cash flow in your business, what is working well and where you could improve.  

Be proactive and take action.  

Ask yourself, how can you improve things?  

If you need to invest in upskilling yourself in this area, then make this a priority.  

Even if you find that cash is abundant for you right now, realise that the decisions you make in the good times can set you up to succeed or put you under pressure in the more challenging times.  

Have a great week!  

Sam Johnsson 

CEO - Farm Owners Academy 

P.S. To learn more about how to run a great farm business and identify opportunities for your farm, join us at the next 2-Day Top Producers Workshop where we will help you find opportunities to improve the profitability of your farm business. You can attend virtually or in person. Click here to register.