Barb Easter is the Director of Client Success at Dryrun, the world’s foremost cash flow modeling and management tool based in Edmonton, Alberta, Canada. What follows is a neatened transcript of the above video.
I’m with you today to talk to you about something that's near and dear to my heart, and that is the cash flow profiles of a number of different kinds of farms.
When it comes to cash flow on the farm, each one is unique like a fingerprint, however there are some big-picture comparisons that we can make. Using Dryrun cash flow software, I walk through 4 different kinds of farms and will explain at a high level about the cash in and cash out as it affects each type of farm.
I do this efficiently by reducing each of the farms to an overall profile of about a hundred dollars. Explaining business in terms of $100 rather than $1M is a conceptual framework that makes everybody comfortable.
People are comfortable with less zeros, and never forget it's people that need to understand cash flow. Explaining a $100 farm rather than a $1M farm makes people comfortable.
Let’s look at what those big picture cash ebbs and flows look like, so that we can then speak to some of the barriers, risks and opportunities that arise when managing and modelling cash for farm clients.
I grew up on a crop farm, growing soybeans, wheat and seed corn in rotation, and now even in town, I only have to walk about 50 feet from where I sit before I'm in a field, just like when I was a child.
So as you can see in the hundred dollar farm, it’s cash flow positive through the first few months of the year, then it incurs significant costs to get the yearly crop cycle up and running. Buying seed and undergoing cyclical startup costs like will my tractor need repair and do I need to hire labour rightaway are a couple that come to mind.
Those issues alone would set the farmer back to a cash flow neutral position where they stay for roughly the next two and a half seasons. However, as they’re waiting for November when crops pay out, along comes October when the costs really ramp up.
Right when cash flow is at an all time low, additional, unexpected and definitely unwelcome costs might assert themselves in equipment, labour, storage, processing and transportation costs. At this point, the farmer could use a second job to fund their vocation. As you can see, the farm is definitely in the red.
November comes and the commodities revenue helps put the farm into the black again. The farmer will hopefully remain cash flow positive until the whole thing starts again in March, however the cyclical shortfall can cause cash management problems that have to be fixed when the revenue flows, unbalancing an already precarious cash flow situation.
*The video talks about the complementary nature of farming some types of livestock and crops together. Check it out.
Cows spend all winter putting on weight at the farmer’s expense, so that when they arrive at market in the springtime, they’ll sell well.
On the hundred dollar beef farm, cash in occurs mid-spring when the cattle are sold. All things being equal, the farm is cash positive through the summertime until it's time to acquire new calves in the fall.
From that point forward, there are ongoing feed and shelter costs for the new calves, which are eating at an astounding rate over the winter as they come through cow-teenagerhood getting ready to be sold in the spring.
Dairy and Egg Production
Notice that there’s not the major ebb and flow as there was in crop farming or livestock production. All in all, this model represents a fairly steady cost/revenue profile.
Over time on the $100 Dairy or Egg Farm, revenues are growing slowly season over season. Notice that as the farmer acquires these cows and chickens for secondary production, they’re actually acquiring them as a different type of asset, meaning cyclicality has been reduced in some aspects, and the long-term nature of milk producers and egg layers is being considered.
Dairy and Egg farming have multi-year production units - the cows and chickens. Like other fixed assets, the farmer can acquire them at intervals to help offset acquisition costs, then he or she can maintain the flock or herd and optimize the aquisition/production/attrition process rather than experiencing a real dip in the cycle.
So from January onward, there is regularly repeating revenue. There are seasonal fluctuations and definitely associated costs like feed, shelter and equipment, but again, the cash profile is fairly steady compared to the other farms we’ve looked at.
Orchards and Vineyards
Spoken about last is our $100 vineyard - a major investment. Vastly exceeding the $100 in terms of buying assets, operating costs, and labour over the first 3 - 10 years, this type of farm operates at a loss during that time. Labour costs are exorbitant because the majority of work still needs to be done by hand.
Operating costs continue without any deliverables - that is, all this time here vines are growing trees are growing and being pruned as an investment rather than direct revenue. Practically speaking, this is the main reason why you see vineyards or orchards start in a corner of a field or pasture and then over time grow - so that the size of the of the loss and the size of the new orchard offset one another.
Consolidating Farm Revenues for Decisionmaking
While farming is a passion, consider taking a look through the cash flow lens to see which revenue streams and costs offset one another. We’ll take a look at some barriers, opportunities and risks associated with farming cash flow soon.