How do dairy farmers avert a cash flow crisis?
Carla Wardin, Michigan Dairy Farmer
February 11, 2021
“Three questions can come from this view of the ag cycle,” said Kevin Bernhardt, extension farm management specialist and University of Wisconsin-Platteville professor.
“How can I survive when the cycle is low?”
“How can I thrive when the cycle is high?”
“How can I prepare for the next low or high?”
Last March, farmers were just coming off five years of stressed profitability when COVID-19 hit, resulting in supply chain disruption and prices plummeting, explained Bernhardt during the webinar “Cash Flow Through a Crisis,” hosted by the University of Wisconsin-Madison Extension. When these types of events occur, farmers have to think of the response as a three-legged stool.
The three-legged stool includes:
“I know there are going to be black swan events that are going to happen. I need to have resilience in my business that it can take a punch and keep on going,” he said.
Farmers also need to figure out a monthly cash flow budget for three reasons:
It forces managers to plan.
It sets up better communication with a lender.
It is the best survival strategy to get farms through tough times.
Bernhardt pointed farmers to a cash flow worksheet available through the University of Wisconsin-Madison. That cash flow worksheet can be obtained from the University of Wisconsin-Madison Extension at Cash flow budgeting – Farm Management (wisc.edu)
Getting started on cash flow “The tool itself can look kind of ornery because you have the months you have to accommodate . . . and you have all the different kinds of inflows and outflows,” he said. “Just because of all of that stuff, it does make it look big . . . but as a person gets into it, it looks big, but it’s fairly easy to work through.”
He explained how farmers can use Schedule F (Form 1040), bank operating loan information, regular monthly bill paying, and input and output records to populate the cash flow spreadsheet.
“Once you do all the planning to get in there, now you look and see what your final net cash flow turns out to be. If it’s negative, you can go back and switch the timing of things,” he suggested, such as putting off a large machinery purchase until the next year.
If the cash flow doesn’t look the way a farmer wants it to look, he offered a laundry list of things owners might want to do to boost cash flow, such as considering production efficiencies, increasing inflow from other operations, getting better quality milk for increased pricing, selling inventory, making culling decisions, or selling assets.
By putting together a cash flow worksheet before the next year, farmers can get a better idea of how to plan for an uncertain future.
“There’s a variety of management decisions I can make right now rather than wait for November 2021 and find out I have a huge negative cash flow I have to worry about,” he said. “So, it’s just a fantastic planning tool, and then a fantastic management tool as I go through the year.”