Risk Management and Cash Flow Planning for Agricultural Businesses

The Wyoming Small Business Development Center (SBDC) Network advisors work with many business clients regarding cash flow and other financial management processes.  While that can be foreign to many folks, especially new businesses, agricultural businesses tend to be good at understanding the seasonal nature of their cash flow and the challenges that the timing of revenue and expenses can create.  Given the current COVID-19 pandemic, that dynamic has been even more unpredictable.  The closure of some meat packing plants and other market factors has led many to wonder, “What can I do to potentially reduce my risk?”

Livestock producers and row crop farmers, often account for the timing difference between income and expenses by using a line of credit from a lender.  The idea being to borrow money on the line to pay expenses when they are due, then pay the loan back when they sell livestock or the crop, hopefully with enough extra for some profit.  While paying attention to operating expenses is always a good idea, now is an especially important time to analyze everything and see if you can cut some of those items that are not necessary. You might source a less expensive option or postpone a planned purchase for another time.  The bottom line is, business owners must know their cost structure and every operation is different!  As they say, cash is king, something that is even more important in times of greater uncertainty.

If you are a small ag business looking for ways to manage your cash flow challenges, this may be a good time to look into using options or futures to hedge your risks for marketing cattle.  If prices happen to go up in the near future and your business purchases a favorable position, you will be sitting good if prices take a tumble with economic uncertainty late in the year or going into the next year.  However, if you are not familiar with this form of investing or risk management, I would encourage you to work with a professional.

Another thing to consider would be to plan now to make sale dates for calves flexible.  If the fall calf prices are low, perhaps having a plan to keep them longer makes sense.  Marketing is going to be extremely important so watch closely.  So much is influenced by the news these days, and we all have 24/7 access to breaking news such as the previously mentioned meat plant closures.  While we hope the worst of the closures is behind us, pay attention and be ready to act accordingly.  Having options considered ahead of time will likely be beneficial and allow movement more quickly.

Another opportunity for agricultural producers to consider is the SBA’s Economic Injury Disaster Loan (EIDL) program.  While EIDLs traditionally have not been available to ag producers, an exception was made for COVID-19.  EIDLs are 30 year, 3.75% interest loans to help with working capital needs, and payments are deferred for one year.  The online application can be found at www.sba.gov.  These loans are underwritten and funded directly by the SBA Office of Disaster Assistance, not through a local lender. Contact your local Wyoming SBDC Network advisor to assist you through this application process and answer any questions you may have about this program.

—

About the Wyoming SBDC Network: The Wyoming SBDC Network offers no-cost advising and technical assistance to help Wyoming entrepreneurs think about, launch, grow, reinvent, or exit their business. In 2019 alone, the Wyoming SBDC Network helped Wyoming entrepreneurs start 108 new businesses, create or save 3,402 jobs and bring a capital impact of more than $24 million to the state. The Wyoming SBDC Network is hosted by the University of Wyoming with state funds from the Wyoming Business Council. Funded in part through a Cooperative Agreement with the U.S. Small Business Administration.