Farm Management

1
Farm Management

• Chapter 13
• Cash Flow Budgeting

2
Chapter Outline

• Features of a Cash Flow Budget
• Constructing a Cash Flow Budget
• Uses for a Cash Flow Budget
• Monitoring Actual Cash Flows
• Investment Analysis Using a Cash Flow Budget

3
Chapter Objectives

• To identify cash flow budgeting as a tool for
  decision making and analysis
• To understand the structure and components of a
  cash flow budget
• To illustrate the procedure for completing a cash
  flow budget
• To describe similarities and differences between
  a cash flow budget and an income statement
• To discuss the uses of a cash flow budget
• To show the use of cash flow budgeting in
  investment analysis

4
Features of a Cash Flow Budget

• Summary of projected CASH inflows and outflows
  over a period of time (usually divided into
  months or quarters)
• Primary purpose is to estimate the amount and
  TIMING of future cash needs (borrowing) and the
  ability of the business to repay loans.

5
Figure 13-1Illustration of cash flows
6
Actual versus Estimated Cash Flows

• Cash Flow Budget contains estimates of cash
  flows for a future time period.
• Statement of Cash Flows records and organizes
  actual cash flows for some past time period.
• Comparing actual values to budgeted values can
  provide insight into the financial structure of
  the business.

7
Table 13-1Simplified Cash Flow Budget
8
Table 13-1Simplified Cash Flow Budget

• Beginning Cash
• Cash Inflow
• Cash Outflow
• Cash Available
• Borrowings
• Repayments
• End Cash Balance
• Outstanding Debt

9
Constructing a Cash Flow Budget

• Develop a whole-farm plan
• Take inventory
• Estimate crop production and livestock feed
  requirements
• Estimate cash receipts from livestock
• Estimate cash crop sales
• 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

10
Table 13-2Form for a Cash Flow Budget
11
Table 13-2 (continued)Form for a Cash Flow Budget
12
Table 13-3Example of a Cash Flow Budget
13
Table 13-3 (continued)Example of a Cash Flow
Budget
14
Calculating Interest Due

• Assume
• Principal repaid in August
• Money borrowed and repaid at the end of the month
• 9 annual interest rate

15
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

16
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.
17
Table 13-4A Form for Monitoring Cash Flows
18
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?
19
Cash Flow Analysis for an Irrigation Investment

• Assumptions 120 acres
• Cost of irrigation system 60,000 Addl crop
  revenue 140/acre
• Down payment in cash 18,000 Addl crop
  expense 30/acre
• Amount financed 42,000 Irrigation
  expense 25/acre

20
Summary of Cash Flow Budgets

• Summary of all cash inflows and outflows for a
  given future time period.
• No non-cash entries are included.
• Can provide an estimate of borrowing needs and
  repayment capacity.
• Can be used to analyze feasibility of
  investment alternatives.