Chapter 13: Kay and Edwards Cash Flow Budgeting Chapter 13: Kay and Edwards

Cash Flow Budget It is this summary of the projected cash inflows and cash outflows for a business over a given period of time. The time period involved is usually an accounting period and is divided up into quarters or months.

Cash Flow Budget Cont. Its primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay these loans and other loans on time. An important first step in cash flow budgeting is to identify the sources and uses of the cash inflow.

Cash Flow Budget Cont. Cash flow budgets contain all cash flows, not just revenue and expenses. It does not include any non-cash items. Personal and non-farm cash revenue expenses are also included in a cash flow budget because they affect the amount of cash available for farm business use.

Cash Flow Budget Cont. The cash flow budget shows the timing of all cash inflow and outflow. The emphasis of a cash flow budget is cash.

Actual Versus Estimated Cash Flow A cash flow can be developed for a future time period, but it also can be developed from past time periods. An actual cash flow statement is a statement comprised of cash inflows and outflows that have already occurred. An estimated cash flow statement is a statement of projected inflows and outflows of cash to the business.

Benefits of an Actual Cash Flow Statement It can be compared with monthly budgeted values at the end of each month. It can provide useful insight into the financial structure of the business and show how the operating, financing, and investing activities combine and interact as sources and uses of cash. Actual cash flows provide a basis for developing the next cash flow budget.

Potential Sources of Cash Inflow The beginning cash balance, or cash on hand at the beginning of the period. Farm product sales or cash revenue from the operation of the farm business. Capital sales or rentals from such things as land, machinery, breeding livestock, and dairy cattle.

Potential Sources of Cash Inflow Cont. Non-business cash receipts, which would include: Non-farm cash income Cash gifts Other sources of cash. New borrowed capital or loans received.

Potential Sources of Cash Outflow Farm operating expenses, which are the normal and usual cash expenses incurred in producing the farm revenue. Capital purchases, which would be the full purchase price of any new capital assets such as land, machinery, and dairy or breeding livestock.

Potential Sources of Cash Outflow Cont. Non-business and other expenses, which would include cash used for living expenses, income and social security taxes, and any uses of cash not covered elsewhere. Principal payments on debt. Interest payments on debt not included as part of the operating expenses.

Constructing a Cash Flow Budget Develop a whole-farm plan. Estimate crop production and livestock feed requirements. Estimate cash receipts from livestock enterprises.

Constructing a Cash Flow Budget Cont. Estimate cash crop sales. Estimate other cash income. Estimate cash farm operating expenses.

Constructing a Cash Flow Budget Cont. Estimate personal and non-farm cash expenses. Estimate purchases and sales of capital assets. Find and record the scheduled principles and interest payments on existing long and short-term debt.

Uses for a Cash Flow Budget A borrowing and debt repayment plan can be developed to fit an individual farm business. A cash flow budget may suggest ways to rearrange purchases and scheduled debt repayments to minimize borrowing.

Uses for a Cash Flow Budget Cont. A cash flow budget combines both business and personal financial affairs into one complete plan. A banker or other lending agency is better able to offer financial advice and spot potential weaknesses or strengths in the business based on a completed cash flow budget.

Uses for a Cash Flow Budget Cont. By planning ahead and knowing when cash will be available, managers can obtain discounts on input purchases by making a prompt cash payment. A cash flow budget can also have a payoff in tax planning by pointing out the income tax effects of the timing of purchases, sales, and capital expenditures.

Uses for a Cash Flow Budget Cont. A cash flow budget can help spot an imbalance between current and noncurrent debt and suggest ways to improve the situation.

Monitoring Actual Cash Flows A cash flow budget can be used as part of a system for monitoring and controlling the cash flows during the year. By monitoring actual cash flows and comparing them to the budgeted cash flows, problems can be identified.

Cash Flow Budget and the Income Statement Projections of net farm income should not be based on a cash flow budget. Two major differences: The cash flow omits any non-cash items. The cash flow budget records all cash flow, even if they are not business revenue or expenses.

Examples of Cash Flow Budgets http://www.extension.iastate.edu/agdm/wholefarm/html/c3-15.html http://www.sites.ext.vt.edu/newsletter-archive/fmu/2007-02_03/cash_flow.html http://www.agmrc.org/business-development/operating-a-business/budgeting/articles/ http://ucanr.edu/sites/placernevadasmallfarms/files/135698.pdf