Cash Flow Budgeting - Extension Dunn County · 2021. 1. 7. · + (1) Cash Inflow from operations +...

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Cash Flow Budgeting1

Author Information

Kevin Bernhardt

Farm Management Specialist,

UW-Extension and

Center for Dairy Profitability

and

Professor of Agri-Business,

UW-Platteville School of Ag

Questions:

608-342-1365

[email protected]

Statement of

Cash Flow

Statement of

Owner Equity

Partial Budget

Pro Forma

Financial St.

TODAY

Whole Farm Budget

Looking Forwards

(Planning for what

will happen)

Looking Backwards

(Analysis of what

has happened)

Financial Statements & Planning Tools

Income

Statement

Balance Sheet

Enterprise Budget

Cash Flow Budget

Capital Budgeting

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What is a Cash Flow Budget

• It’s a planning document for cash management that shows projected/planned inflows and outflows of cash

– Key word is “cash”

• If cash is not exchanging hands it does not go on the cash flow budget

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What is a Cash Flow Budget

Tool for Cash Management

- Not a measure of profit performance or wealth position

- Just management of cash sources and uses

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Why

Why a Cash Flow BudgetWhy Spend Valuable Management Time?

Three Primary Reasons

1. Forces the planning function of management. Have to critically think about:– Business model and practices

– input amounts and prices

– labor needs

– expected production and prices

– capital investment plans

– borrowing needs

– debt repayment

– investment plans

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Plan For Profits – Work Your Plan

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2. Communication/planning with your lender

− Setting up lines of credit

− Capital investments

− Reduce surprises

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3. Survival strategy during times of poor profitability

− Cash flow gets the business to the other side of the profitability crisis

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Cash Flow

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Cash Flow ≠ Income Statement

• Cash flow does not include

– Depreciation

– Inventory changes

– Accts payable/receivable changes

• Cash flow does include

– Principal payments

– Cash payments for capital assets

– New loan proceeds

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You can cash flow very nicely while going broke (think capital asset sales or accts payable)

No Cash is exchanging hands

Cash is exchanging hands

Cash Flow ≠ Enterprise or Economic Budget

• Cash flow does not include

– Depreciation

– Opportunity costs

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+ (1) Cash Inflow from operations + (2) Capital asset sales + (3) Non-farm sources – (5) Cash Outflow - operations – (6) Capital asset purchases – (7) Non-farm outflows – (8) Scheduled debt payments

+ (4) New Borrowing

= Final Net Cash Flow

Cash Flow Structure

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Cash Inflows

Cash Outflows

New Borrowing

Quiz Time

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• My cash flow budget is a positive $125,000, which means if all goes according to plan I will have a profitable year.

1. True

2. False

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Where Does it Go?Milk Sales?

1. Inflow from farm operations

2. Inflow from capital asset sales

3. Inflow from non-farm sources

4. Outflow for farm operations

5. Outflow for capital asset purchases

6. Outflow for non-farm reasons

7. Debt payment

8. New borrowing

9. Not on cash flow

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Where Does it Go?Son’s car insurance payment?

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7. Debt payment

8. New borrowing

9. Not on cash flow

Where Does it Go?Depreciation costs?

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7. Debt payment

8. New borrowing

9. Not on cash flow

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Where Does it Go?Sale of tractor?

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7. Debt payment

8. New borrowing

9. Not on cash flow

Where Does it Go?Aunt Hazel’s million dollar inheritance?

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7. Debt payment

8. New borrowing

9. Not on cash flow

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Where Does it Go?Mortgage Payment?

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7. Debt payment

8. New borrowing

9. Not on cash flow

Where Does it Go?New Short-term operating loan?

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7. Debt payment

8. New borrowing

9. Not on cash flow

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Where Does it Go?Seed purchased on credit?

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7. Debt payment

8. New borrowing

9. Not on cash flow

Time to Get Dirty

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Cash Flow as Ongoing Management Tool

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Cash Flow as Ongoing Management Tool

• It’s March

– Price projections have declined for second half of year especially.

– Cash Flow takes a hit

– Management Action in March

• Sell more of expected grain production

• Carry over more operating debt

• Reduce prepaid expenses plans

• …

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Cash Flow Results Too Low or Negative – What Do I Do?

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In Real-Life, Cash Flow Can’t Be Negative!!

Something Has to Give!!!

Higher Accounts Payable (bills not paid)

Higher Credit Card Balances

Sale of Capital Assets

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How To Increase Cash Flow

1. Change timing of inflows and outflows

2. Increase Inflows and/or Decrease Outflows

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Increase inflows, decrease outflows:

+ Cash Inflow from operations + Capital asset sales + Non-farm sources – Cash Outflow from operations – Capital asset purchases – Non-farm outflows – Scheduled debt payments+ New Borrowing

= Final Cash Flow

How To Increase Cash Flow30

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How to Increase Cash Flow

+ Increase Cash Inflow from operations • Greater production efficiency

• Better price/marketing

• Sell inventory

– tax consequences

• Benefit/cost of culling decisions

• Custom work

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+ Capital asset sales (tractors, land, cows)• Sell capital assets particularly under-performing ones

– Creates new cash flow

– Lose future potential income from use of that asset

• Outsource activities and sell associated assets– Sell combine and custom-hire combining

• Sell low profitability enterprises– Do you have non-productive or under-performing

assets/activities/enterprises that are not pulling their weight

– Tax consequences

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+ Increase income from non-farm sources • Off-farm income

• Sale of non-farm assets

• New/Additional family contribution

• Investor partner

• Agritourism, hunting fees, horse boarding, storage for boats and campers

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– Reduce Cash Outflow from operations• Reduce variable costs (feed, seed, fertilizer, custom

hire, etc.)– Negotiate a lower price

– Cheaper ration ingredients

– Better feed management

– Variable rate application

• Reduce Labor costs

• Reduce Land costs– Negotiate contracts

• Collaboration (bulk buying, shared field work, manure fertilizer, shared machinery, etc.)

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– Delay/Reduce capital asset purchases • Cost-benefit via repairs

• Short-term custom hire

• Lease

• Collaborative swop (machinery, labor, combination)

• Negotiation (sell it for less or don’t sell it to me!)

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– Reduce non-farm outflows • Family living withdrawal

• Any “Family bonuses” not related to farm operations– Entertainment

– Repairs to non-farm assets

– Insurance

– Christmas bonus

– Room and Board

– Tractor pulling expenses

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– Reduce scheduled debt payments • Re-structure and lengthen amortization

• Interest only payments

• Debt consolidation– Be wary of mixing debt purpose

• Negotiate – Lower interest rate

– Principal write-off

– Longer amortization

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“Negotiate” means both parties get something for

their troubles!!- Additional collateral

- Marketing plan- Risk Mgt plan

- Co-signor


+ New Borrowing • Re-structure and borrow additional against equity

• New/Additional operating line of credit

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Questions

• Kevin Bernhardt

– 608-342-1365

– [email protected]

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UW-Division of Extension Topic Hub

https://farms.extension.wisc.edu/articles/cash-flow-budgeting/



Cash Flow Budgeting - Extension Dunn County · 2021. 1. 7. · + (1) Cash Inflow from operations +...

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Transcript of Cash Flow Budgeting - Extension Dunn County · 2021. 1. 7. · + (1) Cash Inflow from operations +...