Cash and Working Capital are King
Cash and Working Capital are King
"...be flexible in your approach as the industry, the economy, and predictions will constantly change"
Cash is King in 2023!
As you’re probably already feeling, overall profits and, in particular, cash profits, were not as strong as predicted for most agribusinesses last year. Despite rainfall levels being fairly good in 2022, rising input costs and some agriculture commodities tracking backwards meant a hit to the market. While every client, farm and operation are different, 2023 is the year where cash and working capital is King!
What we are generally seeing across the market is that planning for the year has been pushed back. This is a result of the overall unprecedented cash profit capacity of 2023, driven by factors such as a later than normal harvest and many clients taking longer breaks off work than usual over the Christmas period, particularly being the first Christmas in many years not impacted by Covid. This month’s article will provide you with useful information about cash planning for 2023, and some key focus areas that are we are concentrating on with our clients that might help you too.
It’s time for a review of your cash flow system and processes. Is your current system working well for you and appropriate for what you now need? If not, it might be time to update or change it.
Think about who and what is contributing to your resources and remember that cash flow can quickly become negative when not all working members of the family are contributing to the cashflow.
When you are trying to forecast your cash flow, remember that most forecasts change constantly so the ability to have a rolling forecast that adapts from month to month is critical. A good way to keep track of the changing forecast is by diarising this in a business calendar and establishing a reference forecast for the year ahead.
Ensure that the working capital for the farm is getting you the right return on investment, and at the right time. If you have a major capital program with a longer payback, there is a risk of it getting delayed, so ensuring you have a higher return on investment project with shorter payback is critical and can help you with forecasting.
One of our key focuses with our clients is reviewing their current payment schedules and amounts. Balloon payments in particular should be reassessed with current interest rate rises, and if necessary, you should look into seeking extensions or restructuring your loan where possible. Plan to go to the bank just once this year and set the right limits from the start. This is important to ensure any additional expenses or potential rises are included so that you have the right working capital limits all through the season.
Even if you have cash in the bank, having the capacity to preserve more than you think you need is critical to not getting caught short later in the year. We are seeing this trend across a lot of clients, with more and more machinery that is usually paid in cash being financed instead, which preserves cash flow rather than being stuck later and not being eligible for loans.
Take the time to review all your finances as you plan for the year, ensuring you have more working capital than you need in this very inconsistent market with consistently rising rates. This includes looking at your current payment schedules, and potentially spreading your payments out longer if you have the ability to pay it back. Changing to interest only payments could be an option to improve your cash flow this year too if you can, rather than operating on principal and interest.
Machinery can be one of the biggest expenses that impacts your cash flow. Taking a proactive approach to planning your upgrades and replacement to equipment in a cost-effective way can prevent you getting caught out when you can’t afford it. SproutAg has a Machinery Capital Planning Tool which can help you determine what is strategically required in the next three years and assist in your proactive planning. You can also assess your return on investment and decide the best option for you with our Contracting or Ownership Comparison Tool.
Another way to get on top of your planning is to compare the usage of your machinery to industry benchmarks and understand the overall effectiveness of your equipment to make informed decisions.
With so many changes happening and predicted to happen in the financial market, it’s important to prepare and plan your cash flow, which might look slightly different than previous years. Most importantly, be flexible in your approach as the industry, the economy, and predictions will constantly change, and remember – cash is king!
If you have any questions, please reach out to your nearest SproutAg adviser.
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