Strategic reserves

In understanding how switching to organic production will impact your production costs, cash flow and risk exposure you may need to look at establishing a strategic reserve before starting transition.  A strategic reserve is different from working capital. Working capital is the readily available money required for day to day operations of a business.  It is the money required to cover short term liabilities.

Reasons for saving up a reserve before starting transition might include:

• Your research indicates that you will have significant investments in the farm (such as soil building or new facilities) or transition costs (like organic feed) without a corresponding premium.  Your financial might indicate that the farm be in deficit for the first four years, be annually profitable in the fifth year and completely break even by year seven.
• Transitioning the farm to organic and developing a new enterprise exposes you to significant risk and vulnerability if something goes wrong.  The reserve will provide a cushion in the event of negative outcomes.
• If 100% of your personal and business capital and debt are tied up in the current operation, then you are unable to move quickly to take advantage of an unexpected opportunity.

The amount of money you will require to save will be different for each farm, business and individual.  The most effective tools for determining the amount required will be the Transition Spreadsheets and using budgeting tools such as cashflows and break even analysis.

Next page