Cash Flow Management and Budgeting for Beef Production An Sci 426

Cash Flow Management  Having enough cash on hand to meet all cash commitments in a timely manner  Without disrupting normal business activities  LIQUIDITY: adequate cash flow

Factors That Affect Liquidity  Low profits  Business growth Investment comes first, added sales later Technology may not work at first Increasing inventories decreases sales  Debt Structure Length of repayment term Use of balloon payments

Factors Affecting Liquidity  Carryover operating debt from past years  High cash land costs Mortgage payments, cash rent, property taxes  High nonfarm expenditures Family living, income taxes, nonfarm investments  Nonfarm income

Financial Contingency Plan  Cash savings  Credit reserve: short term loans  Credit reserve: refinance land debt  Stretch out repayment on loans  Use balloon payments  Liquidate current assets: grain and livestock

Financial Contingency Plan  Liquidate fixed assets: breeding stock, equipment, land  Reduce nonfarm expenses or increase nonfarm income  Borrow from family members  Bankruptcy

 A recorded projection of the amount and timing of all cash inflows and outflows in each accounting period Cash Flow Budget

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 1. Beginning cash on hand 2. Sales and other cash income 3. New loans received 4. Sales of capital assets 5. Nonfarm income

Cash Outflows 1. Cash expenses 2. Principal payments 3. Purchase of capital assets 4. Nonfarm expenses 5. Ending cash on hand

Do not include:  Depreciation  Opportunity costs Unpaid labor Return on equity  Any other noncash income or expenses

Cash Flow Budgets Can Be:  Annual  Quarterly  Bi-monthly  Monthly 1. Estimate cash inflows and outflows for the entire year first. 2. Distribute the annual totals among the periods within the year.

Allocate Annual Income Whole Year Jan- March April- June July- Sept. Oct.- Dec Beans10,000 = $70,000 $20,000$25,000$0$35,000 Calves75 $700 = $52,500 $0 $52,500

Allocate Annual Expenses Whole Year Jan- March April- June July- Sept. Oct.- Dec Seed$25,000$6,000$12,000$0$7,000 Fuel$28,000$2,000$10,000$4,000$12,000 Living$30,000$7,500

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  Use loan funds to purchase machinery and equipment instead of all cash  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

 Decision Tools  Information Files  Newsletter Articles  File C3-15, “Cash Flow Budget”

Making the Cash Flow  Look for periods with negative net cash flows  Use operating line to fill in the gaps  Positive cash flow is not the same as profits

Making the Cash --- Flow

Happy Budgeting!