Do we need cash flow projections?

Farmers, are you going to be profitable in 2015? Will you have enough money to make your loan payments or to even buy groceries? You may not have worried about things like this the past few years, but as Bob Dylan sang, “the times they are a changin’.” If you follow the commodity markets at all, it is clear to see that prices keep falling and do not look very good for 2015. On a positive note, it appears that input prices don’t appear to be rising much and will be similar to 2014, but with the projected prices for grain being down, cash will be much tighter in 2015. How will this affect your operation?

The best way to determine how you will fare next year is to project what the year will look like. It is likely that at some point in your career your loan officer has asked you to put a cash flow projection together. But, if you are like most producers, you did not put much thought into it, because it is all estimates and can be made to say anything you want it to, right? And why should you have to do a cash flow for the banker, isn’t that their job? I will admit that I was guilty of doing the projections for most of my customers when I was an ag banker; however, I now feel that it is more important than ever for the producer to be involved in this process. Contrary to what you may think, these are your numbers, not the banker’s.

Some producers (and lenders) avoid the process because it is based on estimating both income and expense for the next year to complete the projection, which is not easy. However, this is not as difficult as it sounds. At this point in the year, you should know the majority of your cash outflows for 2015, including: loan payments, cash rents, crop input expenses, and planned capital purchases. This leaves only crop yield and price as well as livestock production and sales to estimate. I encourage producers to estimate production by using historical yields and prices based off of the futures market. You should be as accurate as possible and error on the conservative side on both price and yield.

There are several benefits to doing an accurate cash flow projection. First, it helps you determine whether you will be profitable or not, which is good to know going into the year rather than being surprised at the end of the year. Secondly, knowing your numbers will help you make educated decisions on expenditures on inputs and capital purchases. Your banker is also interested as it helps them determine how much money and when you may need it to borrow to cover expenses for the year. Knowing when your large outflows of cash are (for loan payments, cash rent, prepays, etc.) also helps you create a marketing plan for when you will need to make sales to generate cash to cover those expenditures.

Unfortunately, projections for the grain side of your operation will not look very good for 2015. Livestock numbers appear that they should remain strong in 2015, which will offset some of the grain losses, but all indications point to a much tighter year than we have experienced recently and the focus appears to have shifted to minimizing losses rather than maximizing profits. So, projecting your cash flow early will be more important than ever for you to make good decisions with your marketing, capital purchases, and income tax planning before the end of 2014.

Producers who are enrolled in the farm management program at Mitchell Technical Institute track their expenses throughout the year, so at the end of the year, they know exactly how much they made (or lost) on each crop (by field) or livestock enterprise. When a producer has accurate historical numbers like these, it makes forecasting for the upcoming year much easier. If you would like help with this process, please contact one of the instructors at the South Dakota Center for Farm/Ranch Management at 605-995-3098 or sdcfrm@mitchelltech.edu.