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Kenyon: Set up a proactive cash flow

A few financial tips for a smoother-running operation

Kenyon: Set up a proactive cash flow

I have said it before and I’ll say it again. Production practices are not the most important part of my business. Intensive cell grazing or bale grazing cannot make or break my business alone. The business side to my ranch is much more important. To see if a production practice is viable for my operation on any given year, I need to first make sure that it is economical. I determine this with a gross margin analysis. This is what will show me if the production practice in question will be profitable.

Once I have determined profitability and weighed the risk involved, I then have to determine whether or not I can afford to do it. Can I finance it, or cash-flow it? For my finances, I run a simple business cash flow, which is linked to my personal cash flow as well. I have an easy to use Excel spreadsheet for my computer that keeps me on top of my finances throughout the year.

Economics and finances are two different calculations, which is again different from my income tax. We need to be careful in our businesses. I have seen many times that a bank will gladly lend you money if you can finance it, even if the venture is completely and totally economically unsound! It is your job to determine profitability; your banker only cares about finances.

I learned years ago the importance of being proactive on my cash flow. By pro­active, I mean looking ahead six to 12 months and predicting any shortfalls on my monthly net cash flow and having the time to adjust and replan to avoid any issues. This might be just selling something earlier or possibly even meeting with a banker early on to deal with a financial crunch. The alternative is to be reactive on my cash flow and have my banker calling me to tell me that I am overdrawn. Bankers are not so easy to deal with if you are always reactive. They are much happier if you are proactive.

My cash flow is simple. The top has a monthly breakdown of my cash inflow. Each profit centre will have a row with how much cash is entering the bank account and when. Some entries can be very straightforward and others can be more complex. The complex entries I will link to another sheet of the workbook and detail out the calculations that come up with that cash inflow.

As an example, for my custom grazing profit centre, I have a separate sheet that breaks down the different pastures and the number of animals that graze on them. I then add in my grazing rate and it automatically calculates the monthly revenue off of each pasture. It then totals up each pasture for each individual month and transfers that calculation back to the main page as one single entry each month. Each profit centre you have might have its own calculation sheet. Once all of the extra sheets are filled in, the main page automatically totals up each month in the columns and each profit centre is totalled up in the rows.

Next we look at our monthly cash outflow. (It is funny how there are always so many more entries in the outflow). Again, all of the cash expenses are detailed and broken down month by month. Similar to the inflow, the more complex calculations can be linked to another sheet. An example of this is that my land rent is detailed on a separate sheet showing who gets paid how much rent and when. The totals are then transferred back as a single monthly entry to the main page in the cash outflow area.

The spreadsheet then of course calculates your monthly net cash flow and rolls the balance from the end of the month to the beginning of the next month for a 12-month period. At a glance this can tell me of any upcoming shortfalls that I might have in the upcoming months. The negative account balances show up in red. If this is the case, I need to adjust and replan to get each month back in the black. I also have this linked to our personal cash flow as our wages and shared utilities can be linked along with the business.

It may take me a few hours to set this cash flow up at the start of the year but once it is up and running, a few minutes each month is all that it takes to monitor, adjust and resave it. It is the easiest cash flow I have seen and it only takes a little bit of knowledge in Excel to be able to operate it. As you adjust one entry to replan your current month, it automatically updates and flows that correction through to every month ahead.

Why run a proactive cash flow? Well, it not only keeps my banker happy and allows my business to run smoother, but I have found the most beneficial bonus is peace of mind. It takes a lot of the stress out of running a business. Even if there is a forthcoming financial issue, I am aware of it and have time to plan for it.

The reactive cash-flow plan is not a lot of fun and is not recommended for any business plan. Be proactive.

About the author


Steve Kenyon runs Greener Pastures Ranching Ltd. in Busby, Alta. You can email him at [email protected] or call 780-307-6500.

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