Find out the best ways to keep a positive cash flow if you’re in the agriculture business.
Agriculture is a key industry in Australia, however, it's also a sector where it's easy to experience cash flow problems.
Poor harvests, fluctuating commodity prices and changing patterns of demand can all help to cause cash shortages for farmers, with events such as these often hard to predict and therefore plan for. And not to mention the impacts of our Australian environment on production thanks to years of drought, as well as the 2019 summer bushfires in New South Wales.
Recent data from the Australian Bureau of Agricultural and Resource Economics found that the value of farm production in fiscal 2019-20 fell slightly to $59 billion, down from the previous year’s $62 billion.
So what can agricultural business owners do in 2020 to help manage their cash flow?
How can you improve your agricultural business' cash flow
There are a few practical steps you can take right now to improve your cash flow, including:
1. Understand your costs
Essential to cash flow management is understanding how much money you're spending. For example, how much does it cost to operate the farm, how much are you paying labourers, and what amount are you taking out of the farm for living expenses?
It's important to have a strong idea of all of this from the beginning so you can keep an eye on your cash flow. There are a range of KPIs you can use to measure your business’ health, so ensure you’re across them.
2. Work out what's causing poor cash flow
If you're experiencing cash flow problems, it could either be short term, such as a poor growing season, which may correct itself in time, or something more long term. It's important you can identify what's causing you to have a negative cash flow so you can remedy it.
Set aside time to thoroughly assess your income, fixed expenses and ongoing expenses to see where there are gaps you can reasonably fill or areas you could reduce to improve overall revenue.
3. Reassess your invoice structures
Slow paying clients can have a significant negative impact on your business’ cash flow. Therefore, there are a few changes you may want to consider making to your invoices, especially if you haven’t assessed them since your business began operating.
For example, you could consider offering discounts for early payments to encourage a higher rate of timely invoice payments. On the flip side, you may also want to consider charging fees for late payments.
How can stagnant cash flow hurt my agricultural business?
It goes without saying that cash flow problems will hurt your business, and the impacts can be substantial when this occurs over the long term.
Long-term cash flow problems in agriculture can include:
This is measured by the physical and economic output of the business. To calculate this you have to look at things like yield per acre or variable costs per unit of output. If your farm is experiencing a high cost of production, you may have an efficiency issue.
Very large farms can have issues when they are too big to manage. On the other hand, farms that are too small may employ too many people, meaning the cost of labour doesn't meet the amount you are producing and selling.
- Debt structure problems.
Many businesses have debts, but there are ways to structure them to improve your cash flow. For example, you could try lengthening your repayment term so that you are paying back less each month.
As an industry that provides over 1.6 million jobs, agriculture is a vital part of Australia's economy. It's essential that farms know how to manage their cash flow if they are to continue this. EarlyPay offers a range of solutions.
Our invoice factoring solutions allow businesses to take out an advance of up to 80% of their outstanding invoices ahead of client payment. This allows your agriculture business to access the working capital it needs to meet overhead demands.
This can be a much more favourable solution than taking out another form of business loan, as you’re not adding another large, ongoing expense to your already growing list. And because invoice financing solutions are backed by your accounts receivable, rather than other forms of loan security, there’s no risk to your business’ assets.
Further, if your agricultural business is in need of new equipment but you’ve been unable to fund these purchases, you may want to consider our equipment finance solutions. Also, as most agricultural businesses are seasonally based, you may also want to look into our line of credit options to unlock the value of your unpaid invoices and help you through those slower months.
For more information about Earlypay’s business finance products, call our friendly team today on 1300 760 205, or email us at [email protected]