7 Strategies for Smart Liquidity Management

Simply defined, liquidity is having cash or assets on hand to pay bills and expenses. Liquidity is particularly important in agriculture given the unique risks – from fluctuating commodity prices and weather volatility to regulatory constraints — along with the financial characteristics of agricultural businesses, including seasonality, family living needs and capital investment considerations.

Liquidity provides stability and flexibility to handle these unique risks and financial characteristics

— and is an essential tool for managing cash flow and financial health over time.

Following are seven strategies to help agricultural businesses monitor their liquidity to maintain financial health.

1. Monitor cash flow – Forecast, budget, and track inflows/outflows to anticipate liquidity needs. You may also want to use cash flow projects to forecast future cash needs and surpluses and control costs during periods of low income.
2. Manage inventory efficiently – Use inventory control methods to minimize storage time and balance supply with demand. Technology may be helpful to help keep track of inventory. This is particularly important in inventory-heavy sectors, such as nurseries, wineries, and farms with crops in storage.
3. Smart debt management – Align payment schedules with seasonality. Maintain target debt levels and refinance when beneficial.
4. Diversify income streams – Generate income from various enterprises/ventures to offset seasonal dips.
5. Secure adequate financing – Plan capital structure and loans to fund growth and new investments. Use operating credit lines for added flexibility.
6. Invest strategically – Invest extra cash in liquid instruments like money markets or mutual funds for easy access.
7. Build an emergency fund – Maintain a liquid cash reserve to handle unexpected events or capital calls.

Key to putting these strategies into action is accurate records. Strong recordkeeping provides a holistic view of your business to ensure you stay on track. For assistance in managing your records, reach out to a Farm Credit East ag tax specialist. Our tax specialists are trained in ag-related rules and regulations and offer flexible recordkeeping services to fit your needs, ensuring their goals don’t get lost in the shuffle.

For a deeper dive into liquidity and how to calculate it, refer to this previous blog on the importance of liquidity for an agricultural operation.

Farm Credit East is committed to agriculture, commercial fishing and forest products, and ready to help with your financing needs.

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