Cash flow is the key to survival for any business. Even the most profitable business on paper can be susceptible to bankruptcy if there is negative cash flow.
For farmers, environmental, bank lending practices and economic conditions have significant impacts on cash flows. Debt repayments are only one aspect of cashflow management for a rural business. Maintaining a comfortable lifestyle, growing the business, supporting other family members and staff and maintaining good land management practices are also important factors to consider.
In the good years, higher profits mean higher taxes. Using the extra cash to pay off debts may seem like a good strategy but the timing may mean funds are limited for effective tax planning strategies and to pay the tax. Then there is also the requirement to build a buffer for the years which aren't so good.
There are different external financing sources to consider for those times when the money coming in is low. Each has different costs and benefits.
A cash flow forecast will identify your current position and assist you to plan for the future. Regular reviews of the forecast will assist you to spot any future setbacks that may leave you short of cash. You can then change your plans to account for this.
The sooner you learn to manage your cash flow, the sooner you will be able to run the business smoothly and keep on top your business' financial health.
A profit budget can be used to improve the financial performance and condition of your existing business. It forces you to think of the future and it assists with keeping all the key players focused on the vision, strategy and goals of the business. The budget provides a means of allocating resources to those parts of the business where they can be used more effectively. Again regular monitoring allows you to identify trouble spots and to take action early.