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4 steps for unplanned income

In years like this one, unplanned income – cash coming in from unplanned sources and at unexpected times – is going to be a reality for many farmers.  Using the four steps outlined below can ensure that unplanned income is managed in a constructive way, strengthening operations for current and future challenges. 

Step 1: Understand where you are at right now. 

Before doing anything, look back at the plan and goals you made for the year.  Determine what has changed. Then, reassess where you are now, and what else you can expect to change for the remainder of the year.  Finally, identify what you know and what you don’t about your liquidity and cash flow.

Step 2: Determine if the unplanned income is getting you back to baseline or is truly extra income.

Often, government payments to farmers are made in direct response to reduced income. If you have reassessed your current position and projections and determined the unplanned income is only getting you back to or closer to your projected baseline, use the income in the way you decided in your initial plan, assuming that plan still makes sense.  This is important even if the income comes in at a time that is much different than you had planned on. (Example: a payment comes in June when you were not anticipating any grain sales until December.)

If you reassessed your situation and determined that some or all the unplanned income is additional income beyond your projections, follow the next step.

Step 3: Analyze your options and make a plan.

Once you make the decision to constructively use this income, most farmers should ask themselves these three questions.

  • Do I have enough working capital? (WC= current assets – current liabilities) Working capital includes your cash, but it also includes grain, calves or any other assets you plan to sell and convert to cash in the next year, minus everything you have to pay in the same time period.  Farmers need to look at the projected total need, and the timing of those needs to determine how much working capital they should have on hand.  Volatile times, such as the one we are currently experiencing, may require a producer to strengthen their working capital position.  Also, it’s worth noting that a little extra cash in the bank might provide some mental wellbeing which is important.  The farm cannot be run without the farmer, so don’t underestimate your own mental health.
  • Should I pay down debt? If your cash position is secure, it’s time to consider paying debt. People often want to look to the highest interest rate debt to reduce principal, but sometimes that may not be the best option.  Instead, consider the following. 
  • Payoff a loan: First, review your balance sheet to see if the unplanned income is enough to pay off an entire loan.  If that’s possible, doing so will completely remove that payment from your cash flow, freeing up cash.  That freedom may end up being valuable in the short-term. 
  • Pay down principal on a loan that can be re-amortized: If you don’t have any loans that can be completely paid off, look at debt that could be re-amortized after the principal paydown. Paying down principal on debt that cannot be re-amortized will still save you interest long term, but will not offer your cash flow any short-term benefit.  Consequently, it may be wiser to store the income as working capital, at least in the short-term. 
  • Can I make a planned capital purchase with cash? Finally, review the planned capital purchases you have coming up.  Making that purchase with cash or with a larger down payment, eliminates or reduces the cash needed in the future to service that debt. This may be the last consideration but minimizing additional liabilities on the balance sheet and/or minimizing cash needed to service those liabilities is a good tool in keeping your farm in a strong position. 

Step 4: Seek input on your plan.

For smaller dollar amounts or established operators, taking the above steps may likely be enough to strategically determine the best use of unplanned income.  For larger amounts of income or young or beginning producers, reaching out to others for a review of your plan could be beneficial.  We encourage our members to reach out to their FCS Financial loan officer who can put another set of eyes on the plan and possibly identify some additional considerations. 

 

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