Farm Management

Chapter 13 Cash Flow Budgeting

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

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Chapter Objectives

1.

2.

To identify cash flow budgeting as a tool for decision making and analysis To understand the structure and components of a cash flow budget 3.

4.

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 5.

6.

To show the use of cash flow budgeting in investment analysis

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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.

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Figure 13-1 Illustration of cash flows

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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.

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Table 13-1 Simplified Cash Flow Budget

farm management chapter 13 1 Beginning cash balance Cash inflow: 2 Farm product sales 3 Capital sales 4 Miscellaneous cash income 5 Total cash inflow Cash outflow: 6 Farm operating expenses 7 Capital purchases 8 Miscellaneous expenses 9 Total cash outflow 10 Cash balance (line 5 - line 9) 11 Borrowed funds needed 12 Loan repayments (principal and interest) 13 Ending cash balance (line 10 + line 11 - line 12) 14 Debt outstanding Time Period 1 $1,000 2,000 0 0 3,000 3,500 10,000 500 14,000 -11,000 11,500 0 500 $11,500 Time Period 2 $500 12,000 5,000 500 18,000 1,800 0 200 2,000 16,000 0 11,700 4,300 $0 7

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 farm management chapter 13 8

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 farm management chapter 13 9

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Table 13-2 Form for a Cash Flow Budget Total Name: I. M. Farmer Jan Feb March 1 Beginning cash balance Operating receipts: 2 Grain and feed 3 Feeder livestock 4 Livestock products 5 Other 6 Capital receipts: 7 Breeding livestock 8 Machinery and equipment 9 Nonfarm income: 10 Wages and salary 11 Investments 12 13 Total cash inflow (add lines 1-12) Operating expenses 14 Seed 15 Fertilizer and lime 16 Chemicals 17 Other crop expenses 18 Gas, oil, and lubricants 19 Hired labor 20 Machine hire 21 Feed and grain 22 Feeder livestock 23 Livestock expenses 24 Repairs - machinery 25 Repairs - buildings 26 Cash rent 27 Supplies 28 Property taxes 29 Insurance 30 Utilities 31 Auto and pickup (farm share) 32 Other farm expenses 33 34 35 Total cash operating expenses

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Table 13-2 (continued) Form for a Cash Flow Budget

Total Jan Feb March Name: I. M. Farmer Capital Expenditures 36 Machinery and equipment 37 Breeding livestock 38 Other expenditures: 39 Family living expenses 40 Income tax and social security 41 Other nonfarm expenses 42 43 Scheduled debt payments 44 Current debt - principal 45 Current debt - interest 46 Noncurrent debt - principal 47 Noncurrent debt - interest 48 Total cash outflow (add lines 35-47) 49 Cash available (line 13 - line 48) New borrowing: 50 Current 51 Noncurrent 52 Total new borrowing Payments on new current debt 53 Principal 54 Interest 55 Total debt payment (line 53 + line 54) 56 Ending cash balance (lines 49 + 52 - 55) Summary of debt outstanding 57 Current 58 Noncurrent 59 Total debt Outstanding 11

Table 13-3 Example of a Cash Flow Budget Cash Flow Budget Name: I. M. Farmer

1 Beginning cash balance Operating receipts: 2 Grain and feed 3 Feeder livestock 4 Livestock products 5 Other 6 Capital receipts: 7 Breeding livestock 8 Machinery and equipment 9 Nonfarm income: 10 Wages and salary 11 Investments 12 Total cash inflow 13 (add lines 1-12) Operating expenses: 14 Seed 15 Fertilizer and lime 16 Chemicals 17 Other crop expenses 18 Gas, oil, lubricants 19 Hired labor 20 Machine hire 21 Feed and grain 22 Feeder livestock 23 Livestock expenses 24 Repairs-machinery 25 Repairs-buildings 26 Cash rent 27 Supplies 28 Property taxes 29 Insurance 30 Utilities 31 Auto and pickup (farm share) 32 Other farm expenses 33 34

Total

2,500

Jan

2,500

Feb March

18,650 15,250 160,000 88,000 20,000 20,000 5,400 3,800 7,200 200 600 200 600 600

April

500 600

May

450

June

450 600 600

July

500 600

Aug

450 88,000 3,800 600

Sept

513

Oct

663

Nov

26,176

Dec

37,376 60,000 60,000 5,400 600 600 600 600 267,100 23,300 39,250 15,850 5,800 26,000 4,000 2,600 3,000 6,000 800 4,000 36,000 7,500 3,600 1,800 1,000 3,400 700 600 1,200 500 1,000 500 50 100 800 500 500 250 700 50 100 100 5,800 8,000 4,000 10,000 500 500 500 1,700 50 100 1,100 1,500 800 1,500 50 100 100 1,050 1,500 1,500 500 600 250 50 100 1,050 500 400 800 1,000 50 100 100 1,100 92,850 500 50 100 800 500 250 50 100 100 6,513 400 500 1,800 50 100 61,263 2,600 1,000 500 1,700 50 100 100 86,776 37,976 8,000 1,000 36,000 1,000 250 50 100 1,500 800 1,000 50 100 12

Table 13-3 (continued) Example of a Cash Flow Budget Total

108,500

Jan

1,650

Feb

3,000

March

21,150

April

14,050

May

4,500

June

2,950

July

650

Aug

1,800

Sept

2,850

Oct

6,050 35 Total cash operating expenses Capital expenditures: 36 Machinery and equipment 37 Breeding livestock 38 Other expenditures: 39 Family living expenses 40 Income tax and social security 41 Other nonfarm expenses 42 43 Scheduled debt payments: 44 Current debt - principal 45 Current debt - interest 46 Noncurrent debt - principal 47 Noncurrent debt - interest 60,000 1,000 36,000 8,000 0 0 32,000 27,200 3,000 3,000 6,000 12,000 60,000 3,000 8,000 3,000 3,000 1,000 3,000 20,000 3,200 3,000 3,000 6,000 12,000 3,000 3,000

Nov

46,400 3,000

Dec

3,450 3,000 Total cash outflow 48 (add lines 35-47) 49 Cash available (line 13-line48) New borrowing: 50 Current 51 Noncurrent 52 Total new borrowing Payments on new current debt 53 Principal 54 Interest Total debt payments 55 (line 53 + line 54) Ending cash balance (lines 49 + 52 - 55) Summary of debt outstanding Current (beginning of $0) Noncurrent (beg. of $340,000) Total debt outstanding 272,700 (5600) 4,650 18,650 24,000 92,150 17,050 15,250 (76,300) (15,950) 7,500 30,150 (6,450) (29,100) 3,650 (2,550) 22,800 70,050 92,700 40,000 132,700 92,700 2,874 95,574 31,526 18,650 15,250 36,800 40,000 76,800 16,400 16,400 500 450 6,900 29,600 6,900 29,600 450 500 3,000 3,000 450 67,400 2,137 69,537 513 5,850 663 9,050 52,213 49,400 37,376 6,450 31,526 25,300 737 26,037 663 26,176 37,376 31,526 0 0 0 36,800 53,200 60,100 89,700 92,700 25,300 25,300 0 0 0 340,000 340,000 334,000 374,000 374,000 374,000 354,000 354,000 348,000 348,000 348,000 348,000 348,000 340,000 340,000 334,000 410,800 427,200 434,100 443,700 446,700 373,300 373,300 348,000 348,000 348,000 13

Calculating Interest Due

March borrowing April borrowing May borrowing June borrowing Total

Principal Interest

$36,800 x 9% x 5/12 of a year = $1,380 $16,400 x 9% x 4/12 of a year = $6,900 x 9% x 3/12 of a year = 492 155 $7,300 x 9% x 2/12 of a year = $67,400 110 $2,137 farm management chapter 13 14

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

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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.

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Table 13-4 A Form for Monitoring Cash Flows

Name___________________ Year ____________ Annual Total Budget to Date Actual to Date farm management chapter 13 1 Beginning cash balance Operating receipts: 2 Grain and feed 3 Feeder livestock 4 Livestock products 5 Other 6 Capital receipts: 7 Breeding livestock 8 Machinery and equipment 9 Nonfarm income: 10 Wages and salary 11 Investments 12 13 Total cash inflow (add lines 1-12) Operating expenses 14 Seed 15 Fertilizer and lime 16 Chemicals 17 Other crop expenses 18 Gas, oil, and lubricants 19 Hired labor 20 Machine hire 21 Feed and grain 22 Feeder livestock 23 Livestock expenses 24 Repairs - machinery 25 Repairs - buildings 26 Cash rent 27 Supplies 28 Property taxes 29 Insurance 30 Utilities 31 Auto and pickup (farm share) 32 Other farm expenses 33 34 35 Total cash operating expenses 17

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?

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Table 13-5 Cash Flow Analysis for an Irrigation Investment

Cash inflow: Increase in crop income Cash Outflow Additional crop expenses Irrigation expenses Principal payments Interest payments Total cash outflow Net cash flow 1 2 Year 3 4 5 $16,800 $16,800 $16,800 $16,800 $16,800 3,600 3,000 14,000 5,040 25,640 -8,840 3,600 3,000 14,000 3,360 23,960 -7,160 3,600 3,000 14,000 1,680 22,280 -5,480 3,600 3,000 0 0 6,600 10,200 3,600 3,000 0 0 6,600 10,200 farm management chapter 13 19

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.

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