Agriculture: Billing and Accounts Receivable
Today's farmers - especially those running smaller independent businesses - struggle to keep cash flow steady. With income largely resting on seasonal cycles, erratic postings to the accounts receivable column are a pretty routine challenge.
Even so, a number of professionals say cleaning up billing and collection systems, as well as paying close attention to cash flow patterns, can go a long way to keeping an agricultural operation in business.
Bill for Balanced Budgets
While many complex factors have contributed to the failure of some small farms, logic dictates that many fall short simply because accounts receivable never saw payment of monies owed.
Experts point out that systematic collection procedures can help owners of smaller operations move toward solvency. A few basic tactics can yield positive results.
- Prepare a contract. Pundits maintain that putting payment, service and delivery terms into a formal agreement, signed by farm owner and customer, greatly reduces the potential for confusion later on. Specifically, when a due date passes with no check in sight, a contract makes it easier for the business owner to press for payment (a late fee - 5 percent, for instance, can be part of the deal). And though it's sometimes more comfortable to let matters slide - especially with loyal customers - sticking to the provisions as written is the only way to get money to the bank.
- Invoice precisely. Research indicates that a whopping 80 percent of collection problems stem from incorrect or incomplete invoice forms. Errors range from incorrect addresses and/or recipients, to insufficient explanation of terms and unclear payment date information. To sidestep these pitfalls, use bill-generation software, which provides templates that do 99 percent of the work. At the very least, a reliable word-processing program goes a long way to making invoices legible and easy to replicate.
- Tighten billing cycles. When stunted cash flow persists, shortening the payment-due period can get the money stream moving again. Rather than operating on a 30- or 60-day cycle, for example, ask for checks within two or three weeks of the billing date; or request a certain portion upfront. A business owner has the privilege of setting his own conditions.
- Repeat the message. Whether a customer is brand new or has been around for 10 years, all invoices should include a full statement of account activity, with order number, shipping date(s) and past-due, as well as current amounts. Listing these details every billing period makes it easier for customers to meet obligations in a timely fashion.
- Keep meticulous records. Every piece of billing information that goes to customers should have its duplicate in the business's records. By the same token, all payments should be posted to accounts receivable immediately, with routine verification of balances. In smaller operations - particularly where farmers do their own bookkeeping - the easiest way to track financial matters is on a continuous basis. Consistent, ongoing maintenance prevents errors that can stall the billing-payment cycle.
Cues on Cash Flow
Money flows into and out of every farm operation, regardless of size. In an ideal word, the activity is steady. In reality, though, agricultural revenues typically seesaw, balancing only when money is available to pay bills, buy equipment or meet payroll. While a solid customer invoicing system helps, most industry analysts concur devising a budget is a key strategy in managing cash flow.
The thought of looking into the murky future can provoke anxiety, but budget planning allows the farm operator to know when money tends to come in and when it goes away.
Categorizing monthly expenses and receipts from the previous year lays the foundation for projecting into the next 12 months. Items might include feed/chemical costs, equipment rental fees, payroll and any other outlay inherent in running the business.
When estimating for the upcoming year, allow for expected increases in costs, as well as for anticipated changes in income.
Monthly budget updates and adjustments should occur as "real" expenses when receipts are posted. This provides the farm owner with an emerging record of cash flow patterns, including potential shortfalls - thus allowing him to come up with an action plan. In addition, an itemized record of this financial activity provides excellent documentation when applying for loans or grants.