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We say agriculture is a capital-intensive industry. I’re always thought it’s just like that and there’s nothing you can do about it. These are just facts that everyone agrees on.
I have now discovered that we can actually do something about it. But also that many do nothing. Other companies work a lot with the turnover rate of money. Why do we not do it in agriculture?
It is about getting the capital you invest to get back into the account as goods sold as soon as possible. But we have far too much “slow” capital lying on a farm. We have invested in things that do not create value. There is also investment in something that only creates value in a long time.
The farm was trimmed for “slow” capital
I can tell you about a case where thinking in the rate of turnover of money completely changed the situation of agriculture.
A bankruptcy farm was purchased by a colleague nearby. The buyer started by removing and selling everything on the farm that was not used. Next, the field operation was outsourced and all field machines were sold. The young stock was reduced to the absolute minimum and later also outsourced in a sale-purchase solution with a heifer breeder. The feedstocks were reduced by selling the part of the silage stock that was older and redundant. At the same time, this meant that the silo capacity on the farm again fit in size. The herd was also trimmed by culling 10% of the lowest producing cows.
After that, the economy was running again on the farm. The revenue was created using far less capital.
Liquidity management is not the same
There is a key figure called CCC (Cash Conversion Cycle) that I can recommend more to work with. I’m not an economist, but to my knowledge, it is not used much in agriculture. I know that many people work with liquidity management with the goal of having sufficient liquidity. But the speed of cash flow is an overlooked key figure. If you get it calculated every quarter and are aware of it, then you will get better and better at keeping your business trimmed. It’s also a way to work with Lean.
What is Cash Conversion Cycle (CCC)?
It is a number that expresses the time (measured in days) that it takes you to convert investments in inventory and other resources to deposit into your account from the sale of the goods you produce.
For example, if you invest 100,000 and get 120,000 back when you sell your goods, then it’s a good business:
- If you get your goods sold after 6 months, then your annual profit is 20,000 x 2 = 40,000
- If you get your goods sold after 24 months, then your annual profit is 20,000 / 2 = 10,000
Another advantage is that if you can turn over the money faster, then you do not need as much liquidity either. And it is also saved money.
What I am doing here is a simplified setup. In fact, the calculation is a bit complicated. I’ve found a calculator here. If you find something easier then I would like to hear from you 🙂
How to set the speed up!
- You can start keeping track of the timing and amount of cash flows in and out of your account. You may find some options for deferring payout or speeding up a payment. There are also companies that “buy” your invoices, so you get your money immediately.
- You need to be very critical when you are offered “great deals” by a seller if you are buying early in the season or in large quantities. The discount you get you can add to lower cash flow rate and poorer liquidity in your own business.
- You can manage your inventories more efficiently. How can you convert your expenses into income faster? Can you reduce your feedstock? Can you raise the young stock faster? Can you reduce the number of young animals without reducing milk production? Can you have the fertilizer delivered directly to the field? Can you get the money for your vegetables or your seeds in advance?
All the efforts that can reduce the time from taking money from your account until they are back again will make your farming more financially sustainable.
