How much cash should your agribusiness keep in reserve?

By Emily Zuver, Senior Assistant Accountant, Holbrook & Manter

Keeping cash reserves is a good practice for any business, no matter what the industry. When it comes to agribusinesses and farming operations, special considerations come into play. This month, we look at some things to keep in mind when budgeting and setting funds aside to keep in reserves.

Cash reserves give you vital breathing room. It ensures you can do things like cover payroll, buy feed, and maintain operations without relying on high-interest loans or dipping into personal funds to bridge short-term gaps.

A good rule of thumb is to have three to six months of operating expenses available in a liquid account. However, that can vary based on the size of your operation. The larger the farm or the business, the higher the fixed costs. We are talking about bigger payroll, extensive land leases, and large equipment fleets that need to be maintained. Work with your accountant to evaluate what you will need in reserves if your operation is particularly large.

How your cash flow changes through the year heavily dictates your reserve needs. When setting your ideal reserve amount, be sure you are evaluating how and when crops pay out and if certain seasons are more financially bleak for you than others. Seasonal income swings mean you will need larger reserves during those times to bridge the gap.

I wish you could consult Mother Nature for a look at the future just like you can your accountant, but that is a pipe dream. Therefore, you need to plan for unexpected expenses due to unpredictable weather. Unpredictability comes in all shapes and sizes, so you also need to plan for livestock illness or the need to replace specialized equipment in a pinch if needed. Again, your accountant can help here. Rely on them.

Building an agribusiness reserve requires consistency. Start small and save in a steady fashion. Treating a monthly payment to your reserve fund like you would any other bill is a good place to start. Have your accountant help you set this up.

Remember, a well-funded reserve protects your livelihood and secures the legacy you work so hard to build. As always, if you have questions, please reach out. I would be happy to help.