Liquidity is the ability to pay bills as they come due. In tough times when selling prices are low or input costs are high, farm managers may not have the liquidity – cash– necessary for paying bills. So decisions have to be made as to which bills should be paid first.
Managers approach cash flow problems differently. Some reduce purchases of inputs such as grain and DHIA or reproduction services while others seek off-farm employment to supplement cash income or for health insurance benefits. Open accounts including credit cards or accounts payables can also be used to work through cash flow problems.
While options do exist, cutting costs in the short run generally comes at the expense of long run profitability. So reducing grain and protein fed to high producing dairy cows or selling off springing heifers can potentially compound cash flow problems over time.
Selling of assets particularly underutilized or nonproductive is another option for generating cash that also carries a potential long-term profit risk. In addition asset sales can trigger significant income tax liabilities, including depreciation recapture and capital gains tax. So care must be taken to allow for the taxes that will need to be paid in the future on assets sold in the near term. Otherwise new cash flow problems will be encountered in the future.
Credit is another short run source of cash. Unfortunately short term borrowing results in subsequent interest and principal payments. So borrowing money does not eliminate cash flow problems; it only delays them.
The following is a list of suggested spending priorities that operators might want to consider when making decisions about how cash should be spent in the short run. This list starts with payments that have to be made and then moves to those expenditures that can be made or delayed depending on the severity of cash flow problems.
1. Accounts payables, (feed mill, veterinarian, A.I. technician or fertilizer dealer) which are charging interest at rates in excess of those charged by commercial lenders.
2. Operating loans.
3. Taxes due.
4. Interest due.
5. Principal payments on:
a. Credit cards and open accounts
b. Operating loans
c. Intermediate loans
d. Long Term Loans
1. Invest in short term and intermediate term assets that offer the potential to increase profit.
b. Livestock equipment and facilities.
Care should be taken not to select short term solutions which may severely limit long-term success. While profit may be a limited prospect, careful cash management can limit the negative effects tough times have on business Solvency and can maximize available Liquidity until overall business financial performance improves.