Why Manage Cash?
Happy New Year to you and your family and many more to come.
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Cash is at the center of all Agribusiness activity. You need cash to start and expand the business, cash to run the business, and you need to generate cash from business activity. The Agribusiness is successful if the excess of the cash it generates over the cash it consumes is a significant reward for the efforts and risks you take in running the business.
Effective cash management can help you!
- Measure and monitor
- Manage
- Achieve cost savings
- Ensure financial stability
- Anticipate problems
- Maximize results
Better cash management means more successful operations. More successful operations mean a higher standard of living to the owners.
Banks and Bankers
The bank is usually a major player in a business’s financial supply chain. Products and services flow from suppliers, through to producers, to customers. Cash flows in the opposite direction. The concept of the supply chain reminds us that information flows in both directions and of the importance of that information flow.
You can deal effectively with your bank by thinking of it as another supplier, albeit an important one. As is the case with any service provider, you want to be proactive and try to understand things from their perspective.
Your bank may actually play several different roles:
- Services in connection with bank accounts, routine processing, and other related services
- Sources of credit
- Sources of investment of excess funds
Optimizing Cash
An important aspect of cash management is to maximize the amount of cash available by
operating efficiently and by effectively managing working capital as well as other assets and liabilities.
What is efficiency?
It is doing things- not wishing you could do them, or dreaming about doing them, or wondering if you can do them. As inventory occupies a central place in the agribusiness, errors in accounting for production costs can have pervasive and unexpected affects. Errors in inventory result in a variety of cash costs ranging from direct revenue losses to excess costs paid and to costs to rectify the problems.
You need a way to track the costs of your production. Costing is important because if you want to control something and make it more efficient, you must first measure it.
For your agribusiness to be successful, you want it to be both efficient and effective. Efficiency refers to maximizing the level of output given a particular level of input. In other words: doing things right. Effectiveness refers to doing the right things, based on your strategy and objectives, doing things that will help achieve your goals.
There is no point doing the wrong thing efficiently! It would be better to not do it in the first place. Effectiveness is the map; efficiency is picking the best route. In the realm of expenses we need to be concerned with both efficiency and effectiveness. Effectiveness tells us to incur the lowest amount of the expense necessary to achieve the objective.
Before getting into the detail of controlling expenses, you need to consider these “big picture issues”:
- Is this activity needed at all? Why?
- Could this activity be performed cheaper, better, or faster by an outside service provider? Why?
- Is there an activity being performed by an outside service provider that your Agribusiness should bring in house? Why?
Agribusinesses are often not concerned about managing disbursements, after all. they are in the driver’s seat and can control if and when to send payment. However, there are several aspects to managing the payables process that affect cash management:
- Controlling payables turnover can have a significant effect on cash
- Maintaining good supplier relationships may improve service
- Negotiating discounts on other terms may improve cash flow
- Good processes reduce likelihood of error in the disbursement process
- The use of credit cards reduces accounts payable administration, but at the risk of impairing control
The Future
As we are all well aware, Agribusiness has changed significantly in the past ten to twenty years and will continue to change. Risk Management is something that was not spoken of a few years ago but is now a very important part of any operation.
Looking at the beef industry as an example you can see why Risk Management has become so important. The shift in the beef dollar has happened as follows:
| 20 Years Ago | Today | |
| Cow/Calf | 23% | 6.4% |
| Feed Lot | 18% | 13.0% |
| Packer | 9% | 27.8% |
| Retailer | 50% | 52.8% |
We at Bruce Martin & Associates feel we can play an important part in making your operations more profitable through an improvement in the financial management of your Agribusiness. Please give us a call to see where we can be of assistance.
Following is a list of questions that the successful producers can answer. Strive to be part of this club. Also following is an interesting article on who is gaining from the increase in efficiency in the food production.
Is Your Business “Bankable”?
- Do you know your cost of production?
- Do you conduct enterprise analysis?
- Do you complete and utilize accrual adjusted income statements?
- Do you have accurate up-to-date balance sheets?
- Do you utilize key financial ratios in your business planning?
- Do you have a three prong risk management program?
- Do you meet key metrics, ratios, & credit scores?
- Do you utilize a business plan?
Survival of the Fattest
Article from January 2011 Report on Business
Written by Eric Reguly
Big Agribusiness is supposed to be the farmer’s and the consumer’s best friend. It provides seeds, fertilizers and biotechnology to farmers, and the logistics and processing that get bananas, beans, coffee and rice to a supermarket near you. Consumers benefit from economies of scale—the bigger the agribusiness, the lower the farm-to-fork costs. Yes, food prices have gone up recently. But if you look at food spending as a percentage of disposable income, it’s still a bargain for Europeans and North Americans, which helps to explain why so many of them look like asteroids.
That rosy view of corporate agriculture is the conventional wisdom. But it could be that the opposite is true: As agribusiness
muscles into food-supply chains, neither the farmer nor the consumer will reap the benefits from enhanced efficiency. Several food economists think the rise of agribusiness brings as many problems as solutions, but they’re being quiet about it. Their silence is not hard to explain. The various United Nations food agencies, including the Food and Agriculture Organization, are financed largely by wealthy countries where corporate agribusiness giants—Monsanto, Dupont, Syngenta, Bayer, BASF, Dow AgroSciences among them—are national champions and big employers. Germany’s HASP and Bayer have more than 100,000 employees apiece, and come equipped with lobbying and PR departments the size of small cities. They are almost immune from official criticism, especially at the UN.
The World Bank has been a bit braver. Three pages buried in its 2008 world development report dealt with the rising power of Big Agribusiness, and highlighted some potentially alarming trends.
The market share of the biggies is on the rise, leading to questions about the potential abuse of economic power. In 2004, the top four suppliers of agrochemicals had a 60% share of their market, up from 47% in 1997. In the seed market, the four biggest players had a 33% share in 2004, up from 23%. In some specialized sectors, concentration is much higher. Monsanto’s worldwide shareof the market for transgenic soybean seeds, which are easy to protect against weeds, was 91% in 2004.
That section of the report, written by World Bank senior economist Shiva Makki, has not been updated. But it’s safe to assume the market share figures are no lower than they were in 2004, and might well be higher in some product lines, given the enormous reach of the top companies and their relentless expansion into the developing world.
Is the concentration harming or helping farmers? Makki’s research suggests that farmers are getting ripped off. As sales and
prices rise, agribusiness giants are capturing a disproportionate share of the profits. Take coffee. The proportion of the retail price received by the main coffee-producing countries (Brazil, Colombia, Indonesia and Vietnam) declined from one-third in the early 1990s to a mere 10% a decade later. Could this be because the top four coffee traders and roasters had 40% or more of the market? Producers of cocoa, tea and bananas are also getting relatively smaller financial hauls as agribusiness clout increases.
Makki’s conclusion is obvious: “The market power of international trading companies” is widening the spreads between what consumers pay for food and what farmers receive for their product. If he’s right, the theory that rising food prices—which
are back near the peaks reached during the global food crisis of 2008—will boost the incomes of small farmers, who will then
deploy the bounty to produce more food, doesn’t ring true.
The effect of agribusiness’s market power on the consumer is harder to judge. Generally speaking, antitrust regulators get their shorts in a knot when an industry starts to look like an oligopoly, wherein a few big companies control big chunks of the market. In software, Microsoft comes to mind. In Canada, Rogers, Bell and Telus have 95% of wireless subscribers. To eliminate the potential for price gouging, the oligopoly companies are usually tightly regulated or, in extreme cases, forced to shed businesses.
Economists generally believe that competitiveness begins to decline when the top four players in an industry control 40% or
more of the market. In agrochemicals, tea, transgenic soybeans, cocoa grinding and many other segments of the food business, the four biggest players control much more than 40%. True, even Makki admits that it’s hard to determine the exact impact of this situation on supermarket prices. But if those market concentrations continue to increase, certainly the potential for price gouging will rise with them. In the United States, Monsanto has been the target of several antitrust investigations.
The worst-case scenario is that food prices for consumers will climb while the proportion of the price that flows back to the
farmer will fall. This double squeeze would make agribusiness even fatter than it already is. The next global food crisis could
well be the result of excessive corporate concentration, not lack of calories. ~
