Optimizing Cash Flow: The Make-or-Break Priority for Microgreens Businesses

Optimizing Cash Flow: The Make-or-Break Priority for Microgreens Business (Episode 6)

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This is Part II, Episode 6 of the “Starting a Microgreens Business: What You Need to Know” Microgreens World series. If you missed Episode 5 or the earlier posts in Part I, “Understanding the Market and Business Model,” you can explore them here: “Microgreens Business.”

“We’re going to need more operating capital to get through this slow season.”

I sighed as I scrutinized the latest cash flow projections for JPure Farms, the microgreens business my friend Steven and I started in 2018.

We were only a few months into our entrepreneurial foray. We quickly learned first-hand how crucial diligent cash flow planning and management are for any small business, especially hyperlocal farms like ours.

During those first few months, a slight delay in a couple of customer payments nearly jeopardized making the mortgage, only after nervously piecing together collections to cover costs that month did the enormity of smoothly managing cash inflows and outflows really hit home for us former corporate finance types.

To optimize microgreens business cash flow, analyze cash cycles, forecast diligently, accelerate collections, strategically manage payables, explore financing, implement creative billing models, utilize financial technologies, get lean operationally, and mitigate risks. Common oversights include not analyzing cycles, forecasting, accelerating collections, managing payables, and mitigating risks.

The reality is stark – running out of capital due to cash flow issues is why over 50% of small businesses fail within the first year [1]. Even promising microgreens startups can quickly find themselves insolvent without rigorous cash flow optimization.

Growing a basement operation into an established supplier with long-time restaurant and grocery partners is a lesson in cash flow we learned along the way.

Whether you’re an urban farming newbie or a microgreens grower veteran, making cash flow planning and management a top priority is absolutely non-negotiable. When inflows and outflows aren’t balanced, you lose critical flexibility to cover expenses, reinvest in growth, and safeguard against unforeseen risks.

Here are some key strategies we learned from navigating the cash flow rollercoaster while scaling JPure Farms that can help set your microgreens business up for sustainable success.

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Conduct an In-Depth Microgreens Business Cash Flow Analysis

Conduct an In-Depth Microgreens Business Cash Flow Analysis

The foundation for effectively managing cash flow is thoroughly mapping your cycles from seed to sale. Track each step across your operations in granular detail – from sowing to harvesting, processing, packaging, invoicing, collections, payables, and expenses.

Quantify how long each phase takes based on recent historical data. Identify any periods or seasonal cycles where predictable outflows for bills and payments routinely exceed inflows from customer collections. Look for opportunities to potentially smooth timing through operational improvements.

Prepare a detailed 6-month or 12-month cash flow projection incorporating your cycles to anticipate potential mismatches between outlays and receipts. Update these forecasts monthly as actual figures come in. You can’t improve cash flow until you’ve fully diagramed your specific sources and timing [2].

What is Cash Flow?

Investopedia says, “Cash flow refers to the total amount of money being transferred into and out of a business, especially as affecting liquidity. It is the movement of money in and out of a company. Cash received signifies inflows, and cash spent is outflows. The cash flow statement is a financial statement that reports a company’s sources and use of cash over time. A company’s cash flow can be categorized as cash flows from operations, investing, and financing.”

For JPure Farms, we charted our complete cycle from seeding trays to the point of sale down to the day! We realized it took around 45 days from harvest to collect customer payments. Predictably, our mortgages and some subscriptions were due on the 1st of each month. Forecasting based on these cycles allowed us to better align the timing of inflows and outflows heading into slower winter months.

The University of Wisconsin-Madison Extension has an Excel-based cash flow budget tool to help you develop your cash flow budget [13, 14, 15.]

Suggest you also try Intuit QuickBooks Online to help you manage all the ins and out of financing a microgreens farm.

Building Detailed Financial Projections for Your Microgreens Farm

Optimize Microgreens Farm Accounts Receivable End-to-End

With your cash flow cycles mapped, optimizing accounts receivable from end-to-end is critical. Be extremely diligent about issuing itemized invoices promptly after each sale or delivery. Track days outstanding on all invoices to identify delays.

Consider offering tiered early payment discounts if beneficial to accelerate inflows. For example, JPure Farms saw improved cash flow when we offered a sliding scale discount of 2/15 net 30 – a 2% discount for payment within 15 days; otherwise, the total amount is due within 30 days. This helped incentivize faster payment while minimizing the impact of discounts offered.

Make accepting electronic payments and credit cards as frictionless as possible for customers. Follow up rigorously on past-due invoices via customized email, text, and phone call sequences. Automated reminder systems can significantly improve collection rates and response times [3].

JPure Farms used a simple custom logic app to send automatic reminders at 7, 15, and 23 days past due. This nearly doubled our collections rate within 30 days.

Continuously evaluate historical late payments and credit terms and adjust policies accordingly if needed. The faster you can collect outstanding customer balances, the better for mitigating cash flow crunches.

It doesn’t replace your accountant. But this book is the next best thing to hiring a part-time CFO. We read the book, and it sits on our desks, “Your First CFO: The Accounting Cure for Small Business Owners” by Pam Prior. You should get a copy.

Strategically Manage Microgreens Business Accounts Payable

As quickly collecting from customers matters, carefully managing your payments and expenses is equally vital for sustainable cash flow. Always take full advantage of any early payment discounts offered by suppliers and vendors – these translate directly to bottom-line savings.

For example, JPure Farms sourced a new packaging supplier offering 5% discounts for payment within 10 days to significantly lower materials costs.

Prioritize paying down the highest-interest debt obligations first when available funds permit. Negotiate extended payment terms with partners wherever possible to ease short-term cash flow strains [4].

When facing working capital constraints, consider negotiating temporary discounted payment plans on larger fixed costs like equipment leases and subscriptions. Avoiding unnecessary late fees and interruptions will minimize drag.

JPure Farms worked with our bank to arrange a 3-month reduced lease program during slower winter months, saving over $2,000 in costs.

If feasible, maintain a minimum contingency reserve to cover unexpected expenses. Automating recurring payments also enhances efficiency and control. The longer you can strategically defer outflows until revenue materializes, the better for smoothing cash needs.

Microgreens Business: Forecast Diligently and Continuously

Maintaining rolling 6-month or 12-month cash flow forecasts is imperative for planning and actively monitoring your cash position [5]. Set specific targets aligned to your microgreens business plan. Routinely compare projected versus actual results to quickly understand timing gaps or lags.

Based on historical data and operating assumptions, implement granular expense and capital budgets across all cost centers. Model projected cash flows for multiple scenarios based on factors like sales fluctuations, investments, new hires, disasters, or other contingencies.

Stress testing your forecasts better equips you to proactively adjust levers before reaching a crisis point. You simply can’t effectively manage cash flow without diligently projecting it across multiple assumptions.

During the first year, JPure Farms built rolling 3-month cash flow forecasts refreshed each month as actuals came in. We tracked performance against budgets for all variable costs and significant outflows. We also estimated 2-3 alternative scenarios to actively stress test the projections based on different risk factors. This visibility better informed our decisions.

Explore Microgreens Farm Working Capital Financing Options

Despite best efforts, unexpected cash shortfalls can and do happen. Having contingency funding options provides needed reserves to handle surprises and smooth timing mismatches. Explore working capital loans, revolving lines of credit, and dynamic billing arrangements that flex to meet capital needs. Think carefull about the pros and cons of each option [6].

For example, merchant cash advances provide immediate funds at a high long-term cost, given their fee structures. An operating line of credit may provide cheaper access to capital that covers near-term dips.

Managing personal and business credit strategically ensures access to capital when disruptions strike [7]. Even in economically solid climates, having reserves available is prudent. The key is being strategic in how and when you leverage different forms of financing.

JPure Farms created an emergency line of credit that gave us access to 6 months of operating capital as a contingency for unforeseen cash shortfalls. We used it selectively during crises (COVID-19, for example), enabling us to preserve ownership equity versus other options.

Get Creative with Microgreens Business Customer Billing and Payment

Beyond traditional financing vehicles, get creative with customer billing and payment structures to provide working capital flexibility. Multi-tiered CSA farm share subscription packages can provide upfront liquidity and guaranteed future revenue [8].

Consider dynamic pricing, where you charge premiums for high-demand crops and peak windows based on freshness, quality, and scarcity factors [9]. Not something we know much about, but pre-selling futures harvests through crowdfunding campaigns engages your community while could secure advance capital.

For example, JPure Farms sold 25% discounted “IOU” certificates redeemable for future produce as a creative cash infusion before slower crop yield months.

The key is designing creative billing models aligned to the unique nature of microgreens and your specific cash flow cycles. This can supplement traditional financing and smooth out volatility.

Explore more on staying on track in Episode #4, “Evaluation: Is Your Microgreens Business on the Right Track?

Leverage Fintech Tools and Analytics for Your Microgreens Business

Leverage Fintech Tools and Analytics for Your Microgreens Business

Modern financial technologies and data analytics tools tailored for agriculture can provide invaluable visibility into cash flow performance [10]. Dedicated farm accounting and bookkeeping software automate tracking and analysis of cash flows.

Want to learn how to use QuickBooks to Manage Your Microgreens Farm Business?

The Penn State University Extension has a course just for Using QuickBooks to Manage Your Farm Business.

Learn basic accounting principles and QuickBooks to run your farm business; this includes Chart of Accounts, Customer and Vendor centers, assets, and loans.

HERE ==> https://extension.psu.edu/using-quickbooks-to-manage-your-farm-business

Integrations with point-of-sale systems offer real-time visibility into accounts receivable. Budgeting and forecasting tools help better predict future capital needs based on data.

Powerful analytics can uncover insights to inform decisions on payment terms, billing cycles, and growth investments to optimize overall cash flow. Leverage these technologies to gain an information edge in strategically managing your working capital.

JPure Farms uses industry-specific accounting tools to automate cash flow tracking and analysis. Custom reporting provides real-time visibility into customer collections, vendor payments, and cash balances to guide daily decisions. Technology gives us an exponential advantage in managing cash.

Get Lean with Microgreens Business and Farm Operations

Use cash flow constraints as motivation for getting lean across all facets of your microgreens business and farm operations [11]. Identify ways to trim costs through more efficient processes and waste reduction. Renegotiate vendor and supplier terms for discounts. Analyze distribution logistics for optimization opportunities.

Improve productivity and output volumes without increasing labor through capital investments like automation. Preplan production schedules based on peak harvest yield periods. Pursue vertical farming advances to maximize per-square-foot output.

Cash limitations force creativity and innovation if channeled effectively. JPure Farms analyzed and revamped harvesting roles to improve labor efficiency by over 20% when capital was tight. Look within operations first before seeking outside financing.

Cash Flow is The Life-Blood of Small Businesses!

Let me help you build a 12-month rolling cash flow projection  (+Cash Flow Statement ) under different scenarios to stress test and forecast your capital needs. I can handle the modeling and analysis.

Key Takeaways: Mitigate Microgreens Business Risk Through Planning

While optimizing cash flow reduces risk, it’s equally essential to prepare contingency plans for managing potential disruptions [12]. Develop relationships with multiple reliable farms to avoid over-reliance on any single supplier. Consider crop insurance to hedge against crop failures or natural disasters. A hurricane or major storm could wipe out even the most secure indoor farm.

Maintain a minimum cash reserve to provide a temporary buffer when shortfalls occur. Ensure adequate insurance coverage for critical assets and revenue streams. Know your breaking point and have open communication with financial partners. Prepare contingency funding plans accounting for varying severity scenarios.

At JPure Farms, we created backup supply relationships with three regional urban farms. We also carried specialty crop insurance, had 4 months of operating reserves, and detailed contingency funding plans for minor to significant disruptions. We learned the hard way it’s critical to be proactive in mitigating cash flow risk factors.

The road to profitability for any business is often paved with unanticipated cash flow bumps. Still, we constantly worked to improve JPure Farms’ capital optimization throughout. But taking a systematic approach to balancing inflows and outflows can provide the flexibility all microgreens businesses need to manage challenges when they arise.

I hope these lessons from the front lines offer a helpful starter guide as you endeavor to build your own sustainable urban farming operation. With preparation and diligence, you can cultivate the cash flow stability essential to turn your microgreens business aspirations into a flourishing and resilient reality.

Wishing you a bountiful journey ahead – let me know if you ever want to chat cash flow!

Up next, Part II Essential Financial Strategies, Episode 7. Fundraising for Your Microgreens Business: Exploring Your Options.

Related Questions

How often should you update cash flow forecasts?

Cash flow forecasts should be updated at least monthly as actual figures come in for high-growth businesses, if not more frequently. This allows quick responses to unexpected changes.

What is a healthy cash flow margin?

A 15-20% cash flow margin (operating cash flow/revenue) is considered healthy, giving flexibility to cover expenses and reinvest. Lower margins can indicate high costs or poor collections.

How can you improve accounts receivable turnover?

Offer incentives for early payment, follow up quickly on past dues, accept credit cards, use billing automation, and implement strict credit policies to accelerate collections.

What expenses can you cut to improve cash flow?

Analyze labor, input materials, inventory, subscriptions, professional fees, distribution logistics, and other variable costs for savings opportunities through efficiency.

How should you prepare for cash flow interruptions?

Build contingency reserves, arrange lines of credit, focus on improving profitability, maintain close relationships with partners, and have detailed risk response plans.

Share the Guide

Struggling with cash flow crunches on your microgreens farm? Don’t go it alone – join our community of urban farmers sharing insights on mastering cash flow management.

Sign up for our newsletter using the form below for tips delivered directly to your inbox. And be sure to share this guide with fellow microgreen growers who can benefit. Let’s build a collaborative network helping one another strengthen the financial foundations of our urban agriculture ventures!

When it comes to cash flow, two heads are better than one.

Remember, the more you learn, the more you grow. So, keep exploring, keep sharing, and keep growing! Sign Up below for our free Microgreens Business Model Email Course.

Build A Commercial Microgreens Startup

In this free 10-lesson email course, we explain why you shouldn’t create a “business plan.”

From there, we take you on a journey of discovery that has been trekked by tens of thousands of other entrepreneurs just like you.

We respect your privacy. Unsubscribe at any time.

References & Resources

  1. Gustafson, Katherine. “Small Business Failure Rate: What Percentage of Small Businesses Fail?” LendingTree, Oct. 2018, www.lendingtree.com/business/small/failure-rate/.
  2. Wood, Meredith. “Cash Flow: What It Is and How to Be Cash Flow Positive.” Fundera.com, Fundera, 7 Jan. 2019, www.fundera.com/blog/cash-flow-positive.

[3] Lazanis, Ryan. “Accounts Receivable Automation: The Complete Guide.” Future Firm, 3 Feb. 2022, https://futurefirm.co/accounts-receivable-automation/.

[4] Paunonen, Erkki. “Working Capital Optimization through Payment Terms.” Sievo.com, https://sievo.com/blog/working-capital-optimization.

[5] “A Small Business Owner’s Guide to Cash Flow Management.” Www.uschamber.com, www.uschamber.com/on-demand/business-strategy/how-to-manage-your-cash-flow-as-a-small-business. Accessed 8 Aug. 2023.

[6] Meredith. “Comparing the Best Small Business Financing Options for 2020.” Fundera, Fundera, 6 Sept. 2018, www.fundera.com/business-loans/guides/small-business-financing.

[7] “Eight Tips for Building Business Credit – Nevada Small Business.” Nevada Small Business, 5 Aug. 2022, https://nevadasmallbusiness.com/building-business-credit/. Accessed 8 Aug. 2023.

[8] Ngige, Lucy. “These 2 Agri-Fintech Startups Want to Help Europe’s Farmers Get Cheaper Finance.” AFN, 19 May 2022, https://agfundernews.com/these-2-agri-fintech-startups-want-to-help-europes-farmers-get-cheaper-finance-for-their-operations. Accessed 8 Aug. 2023.

[9] “Breakeven Sales Volume | Ag Decision Maker.” Www.extension.iastate.edu, https://www.extension.iastate.edu/agdm/wholefarm/html/c5-201.html.

[10] “Farm Accounting Software Buyers Guide – 2023 – Software Advice.” Www.softwareadvice.com, www.softwareadvice.com/accounting/agriculture-software-comparison/buyers-guide/. Accessed 8 Aug. 2023.

[11] Team, Wallstreetmojo. “Cost Cutting.” WallStreetMojo, 25 Jan. 2023, www.wallstreetmojo.com/cost-cutting/.

[12] “Farmeron – Funding, Financials, Valuation & Investors.” Crunchbase, www.crunchbase.com/organization/farmeron/company_financials. Accessed 8 Aug. 2023.

[13] “Farm Pulse – Financial Management Program.” Farm Management, https://farms.extension.wisc.edu/programs/farm-pulse/. Accessed 8 Aug. 2023.

  1. “Explanation of Cash Flow Budgeting spreadsheet tool instructional document.” Wisc.edu, 2023, https://farms.extension.wisc.edu/files/2020/04/Cash-Flow-Budgeting-directions_Bernhardt2021.docx. Accessed 8 Aug. 2023.
  2. Extension Cash Flow Budget Tool. Google.com, 2023, https://drive.google.com/uc?id=14dLQtKeHdstbyhSliOdrTRXaWZCRd5qJ&export=download. Accessed 8 Aug. 2023.
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