1. Cash Flow Budget What is it?What is it? –It is a summary of the cash inflows and outflows over a given period of time. –It is an important forward planning tool. Purpose :Purpose : –Estimate future borrowing needs –Estimates the loan repayment capacity –Schedule payments and harvests

2. Cash Flow Budget

3. Characteristics Includes all cash income and cash expenses.Includes all cash income and cash expenses. –Cash inflows would include sale of capital items and new loans. –Cash outflows would include payment on loans and cost of new capital assets. –Includes personal cash income and expenses Does not include any noncash income or noncash expenses.Does not include any noncash income or noncash expenses. –For example, it does not include inventory changes or depreciation Includes the timing of cash flows (monthly)Includes the timing of cash flows (monthly)

4. Mechanic of the cash flow budget

5. Cash Flow Coverage Ratio Liquidity indicatorLiquidity indicator cash available ÷ cash required for interest and and principal payments of real estate and equipment loanscash available ÷ cash required for interest and and principal payments of real estate and equipment loans Excludes payments on the operating loan balance because they are flexibleExcludes payments on the operating loan balance because they are flexible Indicates the extent to which the excess cash generated by the business provides a cushion for or flexibility in covering these debt-servicing requirementsIndicates the extent to which the excess cash generated by the business provides a cushion for or flexibility in covering these debt-servicing requirements  cash flow coverage ratio =  liquidity  cash flow coverage ratio =  liquidity

6. Debt-Servicing ratio Liquidity indicatorLiquidity indicator Cash required for interest and principal payments  by total cash inflowCash required for interest and principal payments  by total cash inflow  ratio =  burden of debt on cash flow  ratio =  burden of debt on cash flow =  liquidity =  liquidity

7. Cash Flow Risk & Sensitivity Ratios excess available cash  total cash availableexcess available cash  total cash available –Percent farm revenue can decline and still meet cash flows –  ratio =  risk

8. Cash Flow Risk & Sensitivity Ratios excess available cash  cash operating expensesexcess available cash  cash operating expenses –Percent farm expenses can increase and still meet cash flows –  ratio =  risk

9. Cash Flow Risk & Sensitivity Ratios excess available cash  total liabilitiesexcess available cash  total liabilities –Percent interest rates can increase and still meet cash flows –  ratio =  risk

10. Uses for a cash flow budget Prevent borrowing too much money too soon.Prevent borrowing too much money too soon. Planning of purchases, harvests and debt payments to minimize borrowing.Planning of purchases, harvests and debt payments to minimize borrowing. Does not measure profitDoes not measure profit

11. Questions Why is machinery depreciation not included in a cash flow budget? Why cash inflows from nonfarm sources and outflows for family living expenses may be included on a farm cash flow budget? Does an estimated positive net cash flow at the end of the year indicate the farm is profitable?