Farm Management

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Farm Management

• Chapter 13
• Cash Flow Budgeting

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Figure 13-1Illustration of cash flows
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Common Types of Cash Flows

• Sunk costs costs that have accrued in the past
• Opportunity costs costs of lost options
• Side effects
• Positive side effects benefits to other
  projects
• Negative side effects costs to other projects
• Changes in net working capital
• Financing costs
• Taxes

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Actual versus Estimated Cash Flows
A cash flow budget contains estimates of cash
flows for a future time period. It is possible
to record and organize actual cash flows for some
past time period into a Statement of Cash
Flows. The actual values can be compared against
the budgeted values. Also, this statement can
provide insight into the financial structure of
the business.
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Table 13-1Simplified Cash Flow Budget
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Constructing a Cash Flow Budget

1. Develop a whole-farm plan
2. Take inventory
3. Estimate crop production and livestock feed
   requirements
4. Estimate cash receipts from livestock
5. Estimate cash crop sales

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Constructing a Cash Flow Budget (continued)

• Estimate other cash income
• Estimate cash farm operating expenses
• Estimate personal and nonfarm cash expenses
• Estimate purchases and sales of capital assets
• Find and record the scheduled principal and
  interest payments on existing debts

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Table 13-2Form for a Cash Flow Budget
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Table 13-2 (continued)Form for a Cash Flow Budget
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Table 13-3Example of a Cash Flow Budget
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Table 13-3 (continued)Example of a Cash Flow
Budget
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Calculating Interest Due
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Uses for a Cash Flow Budget

• Plan borrowing and debt repayment
• Suggest ways to minimize borrowing
• Combine business and personal financial affairs
  into one complete plan
• Help establish realistic line of credit
• Plan purchases to obtain discounts
• Aid tax planning
• Find imbalances between current and noncurrent
  debt

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Monitoring Actual Cash Flows
A cash flow budget can be used for monitoring and
control. The budgeted amounts can be compared to
what actually transpires.
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Table 13-4A Form for Monitoring Cash Flows
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Investment Analysis Using a Cash Flow Budget
Will a new investment generate enough cash income
to meet its additional cash requirements?
In other words, is the investment financially
feasible?
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Table 13-5Cash Flow Analysis for an Irrigation
Investment
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Summary
A cash flow budget is a summary of all cash
inflows and outflows for a given future time
period. No noncash entries are included. This
budget can provide an estimate of borrowing needs
and repayment capacity. It can also be used to
analyze the feasibility of investment
alternatives.
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1. Why is machinery depreciation not included on
a cash flow budget?

• Machinery depreciation is a noncash expense and
  only expenses requiring a cash outflow are
  included on a cash flow budget. For this reason,
  a cash flow budget contains no depreciation of
  any kind.

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2. Identify four sources of cash inflows which
would not be included on an income statement but
which would be on a cash flow budget. Why are
they on the cash flow budget?

• Cash received from 1) new loans, 2) nonfarm
  income, 3) full sale price of capital assets, and
  4) gifts and inheritances. They are on a cash
  flow budget because they are cash inflows and
  represent cash, which is or could be available
  for farm use even though they are not farm
  business revenues.

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3. Identify four types of cash outflows which
would not be included on an income statement but
which would be on a cash flow budget. Why are
they on the cash flow budget?

• Cash used for 1) principal payments on debt, 2)
  full purchase price of capital assets, 3) family
  living expenses and other personal withdrawals,
  and 4) income and self employment taxes. They
  are on a cash flow budget because each requires
  the expenditure of cash but are not farm business
  expenses.

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4. Identify four noncash entries found on an
income statement but not on a cash flow budget

• Noncash entries found on an income statement but
  not on a cash flow budget include 1) inventory
  changes,
• 2) accounts receivable, 3) accounts payable, and
  4) depreciation

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5. Discuss the truth or falsity of the following
statement A cash flow budget is used primarily
to show profit from the business.

• This statement is false. A cash flow budget
  should not be used to project profit. Questions
  2, 3, and 4 above illustrate some of the major
  differences between finding net cash flow and net
  farm income. While a large number of the same
  items appear on both of these financial
  documents, there are too many differences to be
  able to estimate net farm income from a cash flow
  budget.

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Discuss how you would use a cash flow budget when
applying for a farm business loan

• A cash flow budget is extremely helpful when
  applying for a loan. It shows why, when, and how
  much money will be needed. Just as important, it
  shows if, when, and how much of the loan can be
  repaid with interest. A lender is interested in
  both aspects but particularly in the repayment
  ability shown on the cash flow budget.

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8. A feasible cash flow budget should project a
positive cash balance for each month of the year,
as well as for the entire year. When making
adjustments to the budget to achieve this, should
you begin with the annual cash flow or the
monthly values? Why