1. AGEC 407 Cash Flow Budgeting What is a cash flow budget? –Summary of cash inflows and outflows for a business over a given period of time –Most important means of financial monitoring What is the purpose of a cash flow budget? –Estimate amount and timing of future borrowing needs –Estimate ability to repay loans on time –Monitor finances and detect problems early

2. AGEC 407 Cash Flow Budgeting Important differences between Cash Flow Budget and Income Statement –Must include all cash flows –Does not include non-cash items –Includes non-farm and personal cash flows –Completed on a monthly basis

3. AGEC 407 Cash Flow Budgeting Sources of cash –Beginning cash balance –Farm product sales or services –Capital sales –Non-business cash receipts –New borrowed capital

4. AGEC 407 Cash Flow Budgeting Uses of cash –Farm operating expenses –Capital purchases –Non-business and personal expenses –Principal payments on debt

5. AGEC 407 Cash Flow Budgeting Importance of the cash flow budget: –Monitor cash flows throughout the year –Project borrowing needs and repayment schedules –May suggest ways to minimize borrowing needs –Help to balance current vs. non-current debt –Help conduct investment feasibility analysis

6. AGEC 407 Cash Flow Budgeting To construct a cash flow budget: –List all cash inflows and outflows by month –Inflows minus outflows give the ending cash balance –Ending cash balance becomes beginning cash balance for next period

7. AGEC 407 Cash Flow Summary Cash farm receipts (+) Capital sales (+) Non-farm Income (-) Cash farm expenses (-) Principal payments on debt (-) Family living withdrawals (=) Cash Available

8. AGEC 407 Cash Flow Budgeting Investment feasibility analysis –Will new investment generate enough additional cash to meet its cash requirements? –Is it financially feasible? –If not feasible on its own, is there enough positive cash flow from other parts of the business to help make it feasible?

9. AGEC 407 Cash Flow Budgeting Can a farm have positive cash flow and negative NFIFO? –Increasing debt –Use up capital resources –Reduce inventories –Non-farm income –Little or no debt –Low family withdrawls

10. AGEC 407 Cash Flow Budgeting Can a farm have positive NFIFO and negative cash flow? –Rapid farm growth –Rapid debt reduction –Large family withdrawls

11. AGEC 407 Cash Flow Budgeting Don’t use cash flow budget to estimate profitability Don’t let a positive cash flow “hide” a negative profit