Working capital may be your best defense against disappearing profit margins as the commodity down cycle drags on, but it's how much of that pile of money you can keep that matters. That's why cash flow management should be your top focus in 2016.

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"Lenders like to hang their hat on strong balance sheets as the savior to bad income periods, but cash flow management is what pays the bills," says Jayme Ungs, a farmer and ag lender at U.S. Bank in Boone, Iowa.

To be sure, cash flow is not getting easier in 2016, and the financial stress is starting to show, say lenders.

Improve cash flow management and keep more working capital in the bank (part one of two) Photo: Thinkstock/Nik_Merkulov

"Cash flow is less robust than when cash prices were a lot higher," says Bob Grote, senior regional credit officer for Wells Fargo, Des Moines, Iowa. "The traffic is about the same as a year ago, but the tone of the conversation now is different. A year ago they were coming in and saying, 'I'm having an OK year, and I want to buy some more equipment and save on taxes.' This year they are coming in and saying, 'I'm a little bit short on my operating funds that I projected because I did not get my grain sold at the price I anticipated.' "

Instead of relying on working capital to bail you out of negative margins, work to project positive cash flows and save your working capital for situations beyond your control, such as drought.

"I work with a lot of really good under 35-year-old farmers who are highly leveraged, but are making more net cash flow than guys with lots of working capital and equity," Ungs says. "The key is management. When you diversify your income, forward-sell your grain or at least use hedging techniques, keep your living expenses in check, and just generally treat the farm like a business, you do well."

Poor cash flow speeds burn rate >>

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Burned out
Poor cash flow can speed what lenders call the "burn rate." That's the speed at which a business runs through its working capital, or liquidity, when economic factors turn sour. (Technically, it's the ratio of working capital to gross income.) In effect, it's a definition for negative cash flow; your burn rate determines at what point in the future your business will run out of money if it continues to spend more than it takes in.

"We have some instances where operations might have negative cash flow," says Ungs. "They can function that way a certain number of years, but they're actually losing net worth over time. I know an operation that lost 70% of its working capital in the last three years. Yes, he had a strong balance sheet to absorb the losses and is still farming today. But with a little cash flow management, he could have planned better and kept those funds instead of losing them."

It's important to know how many days of working capital your business has at the beginning of the growing season, says Curt Covington, senior vice president at Farmer Mac, a publicly held corporation chartered in 1988 as a secondary market for ag mortgages, such as farmland and rural housing.

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"Instead of measuring working capital in absolute dollars, measure it in days," he suggests. "If you look at it by days, you can figure out if you're extending time; you're less reliant on a lender and more relying on yourself."

To manage cash flow, look at the top 20% of the expenses you can control, and challenge yourself to get those numbers down. Take a close, hard look at living and capital expenses.

"There's three pieces to that downsize: land, machinery and labor force, including possibly a family member," Covington says. "Quite frankly, there may be a need to sell assets."

Next: How to keep more working capital in your pocket, despite $3.50 corn