Managing Cash Flow Crunches

Let's face it – the bank account is not always flush with the funds we need to run farm businesses. The best way to navigate cash flow crunches is to communicate, keep current on record keeping, and be prepared.

What is a cash flow crunch? A crunch occurs when there is not enough cash on hand to meet current bills. Cash flow crunches can be caused by late payments, unexpected or increased expenses, low sales, or slow bookkeeping. According to the US Bureau of Labor Statistics, 65% of new businesses fail within 10 years, and 82% of all business failures can be attributed to poor cash flow management. Implementing good financial habits can help farms manage through the lean years and stay in business.

The very first thing to do is update and evaluate your cash flow statement. Where is your money flowing? Are sales slow compared to other years? Is there a certain area where costs or spending has increased? Move inventory or lower spending accordingly. 

The following are some low-hanging fruit — easy ways to manage through a cash crunch.

Implement a No or Low Spend Month or Quarter

During tight times, only pay bills and make purchases that are absolutely necessary to business operations. This may mean that new inventory is limited for a period of time, but also provides time to move products that may have been sitting idle.

Reward Timely Payments

Are you able to provide a 2% discount for early payments? Can you offer a discount for paying in cash instead of with a card? Rewarding timely payments may motivate accounts to pay up sooner to restore the cash balance.

Request Discounts

Are there coupons available or discounts for purchasing volume? Investigate opportunities. It doesn’t hurt to ask.

Negotiate Payments

Are you able to make smaller payments with a promise of the amount in full by a specific date? Have an honest conversation with vendors about your accounts payable and make a plan together.

The following tactics may require harder conversations:

Negotiate Loan or Mortgage Payments

Are you able to temporarily stop payments or make interest-only payments for a period of time until cash flow has been restored?

Re-Evaluate Your Pricing

Take a good, hard look at your current cost of production and current prices. If you’re in a position to name your price, adjust your prices accordingly for profit, and communicate to your customers why the change was necessary and when it will take place. If you're a price taker, can you renegotiate your contract, search for new opportunities, or diversify your income in another way to meet your obligations?

Rely on Your Emergency Funds

Federal Reserve Banks report that 53% of small business owners used personal savings in 2022 in response to business financial challenges. Lean into personal savings if necessary, but be sure to pay yourself back.

What if you don’t have an emergency fund? There's no better time to start one than today. It is recommended that businesses reserve at least 10% of their annual revenue or at least three full months of expenses (Federal Reserve Banks). The savings should be liquid — either in cash, a savings account, or prepaid credit cards.

Currently, several trusted financial institutions offer "high yield" savings accounts. While "high yield" is often 3–4%, that is interest that cash or regular savings accounts are not earning to benefit your business.

The key to contributing to an emergency fund is to be consistent. While you may only be able to stash away small amounts each month or quarter, having any amount of savings is still beneficial over having nothing available in a time of need.

Explore Small Business Financing 

Tapping into small business financing options may be a requirement to get through a tight cash crunch. Commonly used programs include credit cards, lines of credit, term loans, and traditional business loans.

Credit cards are beneficial to get over a short lull in cash — when cash is coming in the next month or two. However, the high interest rates make credit cards a challenge when you don't know when the cash will finally flow back. 

Lines of credit, term loans, and traditional business loans are all financing tools that can help you manage the cash in your business. Lines of credit typically have variable interest rates, and you'll need to budget for the interest payments in addition to paying down the principal in a timely manner. Term loans allow you to make interest-only payments until a principal payment is due. For example, a grain farm may use a term loan to pay off an unexpected equipment purchase. The farm would make a monthly fixed interest payment and then make an annual principal payment every winter after the crops have been harvested and sold. Traditional business loans have a fixed interest rate where you pay both interest and principal every month.

To set yourself up for success in financial lending, be sure that you have an open and communicative relationship with your lender. Ensure that they understand your business, your products, your business timelines, and your financial needs. A good relationship with your lender will help them serve you in a timely manner, instead of needing to meet to talk through what is going on, collect financial information, and update business plans and financial statements. When you are prepared, you can react, make decisions, and move forward with more confidence.

Don't have a lender yet? The best time to meet your future lender is during your good times, when you don’t need them. You can meet your local agricultural lender by making an appointment or visiting with them at local agriculture meetings, conferences, or farm shows. When you find yourself in need of financing, be sure to arm yourself with an updated business plan with 3 to 5 years of cash flow projections, 3 years of past tax returns, and an updated balance sheet.

In summary, open communication, updated bookkeeping, and timely decision-making are the best tools to use when navigating a cash crunch.