Rising input costs, inflation and a pending economic recession have producers anticipating tightening down on spending in 2023. During a Kansas State University Extension meeting last Thursday in Parsons, Oklahoma State University regional ag economist Scott Clawson shared his best advice for assessing available capital and spending this year.
The first key component, is identifying monthly spending.
1. Build a Monthly Cash Flow
“A monthly cash flow is the most simple thing from a finance perspective,” Clawson said. “There’s no fancy math. There’s no formulas except adding and subtracting. Just document cash in and cash out.”
Clawson said a cash flow can be a prediction of coming expense based on previous years, as well as a record of actual cash in and out in the current year. If the two differ from each other, that’s okay.
“If I would have done this in February of 2022, I would have missed my hay costs by 300%,” Clawson said. “It’s the idea. It’s not always going to be correct but it can steer your decision-making in ways that will benefit you.”
Producers with an idea of their monthly cash flow can more easily identify times of the year when expenses are high and times when extra cash is available to make improvements or investments.
“If I’m going to make any kind of changes on my operation, it will require some capital,” Clawson said. “If I’m going to change my system, make improvements here or there, and have to have some cash as a way to do that, having a cash flow can help highlight that.”
Clawson, a former banker, said having a cash flow record also can help decision-making for lenders when producers need to make changes to lines of credit.
“It’s also going to give us something a little more solid if we are going last year or this year to approach our lender about making adjustments to our line of credit,” Clawson said. “This is going to give us something tangible to work with.”
2.Calculate Working Capital Monthly
To delve deeper into identifying liabilities and assets to cover liabilities, Clawson said calculating up-to-date working capital can illuminate areas cash flow calculations might have missed.
“Our operating cash flow that we’ve got, if we’re operating in a good year, might catch all of those liabilities,” Clawson said. “You’ll know if it’s costing one number specifically, as long as crop prices are high and costs are relatively modest.”
Clawson said working capital can show the difference between current assets on the farm and potential liabilities.
“Working capital is all of the short term assets we’ve got — calves on the ground, stocker cattle, stored grain, things like that,” Clawson said. “Things that we can tangibly turn into cash.”
Clawson said producers should want the gap between current assets and liabilities to be as positive as possible.
While zeroing a line of credit might not be a move everyone makes each year, Clawson said the ability to complete that goal is a good indicator of financial soundness.
“If you can’t zero your line of credit through the years, it’s a good indication our working capital is upside down,” Clawson said.
3. Identify Leaches and Leeches
A farm or ranch is essentially collection of investments, Clawson said. Separating out enterprises, cow-calf from stockers, hay-making, land ownership and other avenues of income, can help spotlight areas of the operation that are causing a financial drain.
“The idea behind finding our leeches would be that we need to separate each of those investments out and identify on a year by year basis which of these things is actually providing value to my operation?” Clawson said.
“In our effort, we might find something where we’re really good at generating value,” Clawson said. “We’ve got to be able to find it and capture it. And then maybe those things that are leaching some of the value off our system. Maybe we can move that to somewhere else.”
Clawson said separating out entities and either identifying ways they are stealing profits from other sectors of the farm or ranch and reevaluating them or renovating the business practices, can be a good decision point for cost of production.
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