1. © Mcgraw-Hill Companies, 2008 Farm Management Chapter 13 Cash Flow Budgeting

2. © Mcgraw-Hill Companies, 2008 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. © Mcgraw-Hill Companies, 2008 Chapter Objectives 1.Identify cash flow budgeting as a tool for decision making and analysis 2.Understand the structure and components of a cash flow budget 3.Illustrate the procedure for completing a cash flow budget 4.Describe similarities and differences between a cash flow budget and an income statement 5.Discuss the uses of a cash flow budget 6.Show the use of cash flow budgeting in investment analysis

4. © Mcgraw-Hill Companies, 2008 Features of a Cash Flow Budget A cash flow budget is a summary of the projected cash inflows and outflows for a business over a period of time. The time period is usually a future accounting period and is divided into quarters or months. As a forward planning tool, its primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay loans.

5. © Mcgraw-Hill Companies, 2008 Figure 13-1 Illustration of cash flows

6. © Mcgraw-Hill Companies, 2008 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.

7. © Mcgraw-Hill Companies, 2008 Table 13-1 Simplified Cash Flow Budget

8. © Mcgraw-Hill Companies, 2008 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

9. © Mcgraw-Hill Companies, 2008 Constructing a Cash Flow Budget (continued) 6.Estimate other cash income 7.Estimate cash farm operating expenses 8.Estimate personal and nonfarm cash expenses 9.Estimate purchases and sales of capital assets 10.Find and record the scheduled principal and interest payments on existing debts

10. © Mcgraw-Hill Companies, 2008 Table 13-2 Form for a Cash Flow Budget

11. © Mcgraw-Hill Companies, 2008 Table 13-2 (continued) Form for a Cash Flow Budget

12. © Mcgraw-Hill Companies, 2008 Table 13-3 Example of a Cash Flow Budget

13. © Mcgraw-Hill Companies, 2008 Table 13-3 (continued) Example of a Cash Flow Budget

14. © Mcgraw-Hill Companies, 2008 Calculating Interest Due

15. © Mcgraw-Hill Companies, 2008 Uses for a Cash Flow Budget 1.Plan borrowing and debt repayment 2.Suggest ways to minimize borrowing 3.Combine business and personal financial affairs into one complete plan 4.Help establish realistic line of credit 5.Plan purchases to obtain discounts 6.Aid tax planning 7.Find imbalances between current and noncurrent debt

16. © Mcgraw-Hill Companies, 2008 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. © Mcgraw-Hill Companies, 2008 Table 13-4 A Form for Monitoring Cash Flows

18. © Mcgraw-Hill Companies, 2008 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. © Mcgraw-Hill Companies, 2008 Table 13-5 Cash Flow Analysis for an Irrigation Investment

20. © Mcgraw-Hill Companies, 2008 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.