Cash Flow Budgeting: Chap.13 What is a cash flow budget used for? What items are included in cash inflows and cash outflows? What adjustments can be made to project a positive cash balance?

Uses for a Cash Flow Budget Project credit requirements and repayment plan Plan marketing patterns Communicate these plans to a lender Useful for monitoring actual cash flows throughout the year Cash flow budgets do not project profits or net farm income.

Cash Inflows Sales and other cash income New loans received Sales of capital assets Nonfarm income Beginning cash on hand

Cash Outflows Cash expenses Principal payments Purchase of capital assets Nonfarm expenses Ending cash on hand

Do not include: Depreciation Opportunity costs Any other noncash income or expenses

Cash Flow Budgets Can Be: Annual Quarterly Bi-monthly Monthly Estimate cash inflows and outflows for the entire year first. Distribute the annual totals among the periods within the year.

Allocate Annual Expenses Whole Year Jan- March April- June July- Sept. Oct.- Dec Seed $25,000 $6,000 $12,000 $7,000 Fuel $28,000 $2,000 $10,000 $4,000

Budget within the year Jan-Feb Mar-Apr May-June July-Aug Sep-Oct Nov-Dec Cash Inflows - Cash Outflows = Cash Balance

Objective: Budget for a positive cash balance at the end of each period May plan for a minimum balance, such as $1,000 Balance the budget for the whole year first, then for each period within the year.

Annual Adjustments to Cash Flow Sell more crops and livestock at end (but less will be available next year) Use loan funds to purchase capital assets Postpone purchase of capital assets Sell capital assets

Annual Adjustments to Cash Flow Postpone repayment of short-term loans (but more will be due next year) Lengthen the repayment period for term loans Reduce nonfarm expenditures Increase nonfarm income

Seasonal Adjustments Shift timing of crop and livestock sales Shift timing of cash expenses (including loan payment dates) Use short-term credit

Profit and Cash Flow In the short run we want to have enough cash to meet all obligations on time. In the long run we want to earn enough to pay all costs including a return to our own labor and investment.

Comparison of Whole Farm Budget and Cash Flow Budget Gross Revenue Sales of grain, livestock, products Other income (USDA payments, etc.) Cash Flow Cash Inflows Sales of grain, livestock, products Other income (USDA payments, etc.) New loans received Sales of capital assets Nonfarm income Cash on hand

Comparison of Whole Farm Budget and Cash Flow Budget Costs Cash variable costs Cash fixed costs Depreciation = Net Farm Income - Opportunity costs = Profit & Ret. to Mgt. Cash Flow Cash Outflows Cash variable costs Cash fixed costs Loan repayments Capital asset purchases Nonfarm expenses = Net cash flow