Making expansion decisions requires a clear picture of your farm, now and into the future. However, understanding cash flow implications can significantly help change this decision-making process from daunting to logical.
When clients sit down to review their financial information with their accountants, they often assess the balance sheet and income statement and discuss any changes to their operations. It's also a time to discuss upcoming farming investment decisions or challenges and receive some professional insight.
When making business decisions such as buying quota, it's important to evaluate your cash flow, and consider other factors that may support or hinder growth. It can be challenging to manage farm expenditures while increasing quota investments.
Planning is needed to manage cash flow throughout the year, especially in the spring when a significant portion of farm spending occurs. Consistently reviewing, updating, and comparing your farm's financial information creates a personalized baseline of data that can then be used to make business decisions - rather than relying on industry averages or other producers' numbers.
While every farm situation is unique, considering the following five questions can help when purchasing quota, and when contemplating other farm investments too:
1. Are you taking advantage of predictable inflows and market opportunities?
With supply-managed commodities like dairy and poultry, the cash inflows for your farm are fairly consistent. Taking advantage of inflow predictability can help leverage your position with the bank to obtain larger operating loans, which can be dedicated to monthly quota bids or other quota purchasing opportunities.
Additionally, waiting for and locking in grain marketing opportunities can provide additional cash support. While it may be beneficial to leverage the flexibility in crop sale markets, especially if it aligns with better pricing opportunities, it's important to consider the cost of holding inventory.
When taking on quota purchasing commitments, your cash flow analysis plan can help avoid the need to market crops immediately due to being cash-strapped. Freeing up inflows can support growth and maintain the ability to pay for inputs while you are investing in quota purchases.
2. Are you reviewing your output commitments and identifying cost savings?
Unexpected costs seem to happen at the worst times. However, reviewing farm commitments and identifying cost savings can help avoid the need for additional lending or using dedicated cash for quota purchases when unpredictable expenses pop up. Having purchase agreements or prepaid contracts with confirmed pricing details is also beneficial.
With feed and fuel costs at historical highs, many cost savings may have already been identified to account for these increases. With additional quota comes the responsibility of increased production. If you have the cash-ability and resources on-farm, pushing your herd or flock's production will also require more management of storage space, time, and the equipment required to manage the increase. This will help prepare for production fluctuations and identify additional needs to be included in the cash flow plan, if necessary.
If you plan to purchase additional livestock or feed as necessary, this should also be reflected in your cash flow plan. Be mindful of whether your facilities and people can handle the demands associated with production increases, such as livestock housing, equipment needs, or storage capacity, and then align your farm decisions to include these necessary investments with quota purchasing.
3. Have you identified priority investments?
A major consideration needs to be given to whether priority investments have been identified on the farm, and what is being done to meet these investment or growth goals. These considerations need to be reflected in your cash flow plan and should be planned proactively to allow for your farm to take on additional growth opportunities, like construction or land purchases.
Try to involve all parties in management discussions. While the decisions should include what's best for the farm, they should also include what is best for you and your family's needs.
When purchasing quota, factor in the ability to allocate resources to sudden problems or other opportunities, so your farm can expand in more ways than one.
Don't forget to take advantage of support initiatives and programs for other farm investments, (provincially or federally) such as:
- Farm grants and government funding programs
- On-farm climate action funds
- Regional opportunities investment tax credit
- Business risk management programs like AgriStability/AgriInvest
- Carbon tax farm fuel rebates.
4. Are you managing your liabilities and long-term commitments?
Fostering a positive relationship between you and your lender may help secure better interest rates, beneficial debt repayment schedules, and even refinancing opportunities. Take advantage of operating loans, crop input loans, or deferred payment programs when they are competitively priced. This can help free up cash. Paying down short and long-term liabilities when business is booming will improve debt ratios for when you need to negotiate lending.
Rather than using cash or operating loans for large capital investments or improvements for your farm, using longer-term financing typically aligns with payback duration. Managing liabilities and debt can sometimes take significant planning, but by doing so, you are matching those predictable principal payments with your cash flow plan.
5. What are your long-term and intergenerational transition plans?
What do you envision for the farm in 5, 10, or even 20 years? And what are your plans to get to that point?
Purchasing quota and committing to growing that investment will inevitably expand the farm, but this expansion needs to be mindful of the transition and direction of the farm in the future. What may seem like a great investment now, may not be for the upcoming generation. Furthermore, what may make sense to the next generation, may not be feasible now. It can be a difficult topic to navigate, but farm transitions need to be carefully considered when planning and managing cash flows. Sitting down and starting the conversation with family and those involved in the business is a great first-step; however, involving your accountant will help set the farm up for success and not cash-strap any potential future investments. Committing to purchasing quota impacts the farm expansion and the direction of operations. Having a general idea of what direction the farm is heading, will help your accountant consider all aspects, not just quota purchases.
By considering these five questions when you're making major farm commitments, like quota purchases, you are considering a broader view of your farming business. This allows your accountant to provide a more comprehensive analysis, so you have a plan for navigating quota purchases and other farm advancements despite the unknowns.
The goals, wants, and needs of each farm are different. Understanding that this decision needs to be specific to your farm's situation is why a cash flow plan for current and future quota purchases, investments, and other business decisions is more complex than simple interest and return on investment. Working together with your accountant will allow you to tailor your cash flow requirements to support growth-focused purchases and help strengthen the farm's ability to be prepared for changes and challenges along the way.
How BDO can help
Making decisions shouldn't be an obstacle to capitalizing on opportunities in the agriculture industry. With trusted assurance and accounting services, you can future proof your farm and set yourself up for success.
For more information, reach out to a BDO agriculture expert today.
Senior Accounting Technician