Which Bills First?

September 3, 2010 08:18 AM

*Extended comments are highlighted in blue.

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Strategies to Weather Economic Downturn

In tough times when selling prices are low or input costs are high, farm managers may not have the cash liquidity necessary for paying bills. So decisions have to be made about which bills to pay first.

Following is a list of spending priorities that operators might want to consider when making decisions about how cash should be spent in the short run. The 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, AI technician, fertilizer dealer) that 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

Finally, invest in short- and intermediate-term assets that offer the potential to increase profit, such as cattle or livestock equipment and facilities.

Take care not to select short-term solutions that may severely limit long-term success. Careful cash management can limit the negative effects tough times have on business solvency. It can maximize available liquidity until overall business financial performance improves.

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 payable, 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-term 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 that are 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-term 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.

—Ken Bolton and Bruce Jones, University of Wisconsin


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