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 firstIncreasing inventories decreases

sales Debt Structure

Length of repayment termUse of balloon payments

Factors Affecting Liquidity

Carryover operating debt from past years

High cash land costsMortgage 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 hand2. Sales and other cash

income3. New loans received4. Sales of capital assets5. Nonfarm income

Cash Outflows

1. Cash expenses2. Principal payments3. Purchase of capital assets4. Nonfarm expenses5. Ending cash on hand

Do not include:

DepreciationOpportunity costs

Unpaid laborReturn 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

WholeYear

Jan-March

April-June

July-Sept.

Oct.-Dec

Beans 10,000 bu@$7.00 =$70,000

$20,000 $25,000 $0 $35,000

Calves 75 head @ $700 =$52,500

$0 $0 $0 $52,500

Allocate Annual Expenses

WholeYear

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 $7,500 $7,500 $7,500

Budget within the year

Jan-Feb

Mar-Apr

May-June

July-Aug

Sep-Oct

Nov-Dec

CashInflows

- Cash Outflows

= CashBalance

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

www.extension.iastate.edu/agdmDecision Tools Information FilesNewsletter ArticlesFile C3-15, “Cash Flow Budget”

Cash Flow BudgetAg Decision Maker -- Iowa State University Extension

Enter your input values in shaded cells.

Name: Year:Frank Case 2006

CASH INFLOWS Total for January March May July September November Operating Year February April June August October December Livestock income 90,176 0 0 18,937 0 0 71,239 Sales of crops 155,620 39,720 33,600 18,000 0 0 64,300 Other crop income 0 0 0 0 0 0 0 USDA payments 9,900 1,650 1,650 1,650 1,650 1,650 1,650 Custom hire income 0 0 0 0 0 0 0 Farm rents, interest 0 0 0 0 0 0 0 Other 4,588 0 1,147 1,147 1,147 1,147 0

Sales of Capital Assets 5,000 0 0 5,000 0 0 0

Financing Total new short-term loans to receive 0 0 0 0 0 0 0 New term loans to receive 0 0 0 0 0 0 0

Nonfarm Income 0 0 0 0 0 0 0

Total Cash Inflows 265,284 41,370 36,397 44,734 2,797 2,797 137,189

Place the cursor over cells with red triangles to read comments.

CASH OUTFLOWS Total for January March May July September November Operating Year February April June August October December Seed 16,885 0 8,443 8,443 0 0 0 Fertilizer and lime 42,030 0 16,812 16,812 8,406 0 0 Pesticides 13,750 0 0 5,500 5,500 2,750 0 Crop insurance 3,300 0 3,300 0 0 0 0 Drying fuel 0 0 0 0 0 0 0 Custom hire or machine rental 14,300 0 0 0 0 0 14,300 Other cash costs per acre 0 0 0 0 0 0 0

Purchased crops 0 0 0 0 0 0 0 Purchased livestock 0 0 0 0 0 0 0 Purchased feed 1,503 251 251 251 251 251 251 Health and veterinary 4,175 0 1,044 1,044 0 1,044 1,044 Marketing 2,205 0 0 463 0 0 1,742 Other cash costs per head 0 0 0 0 0 0 0

Real estate taxes 9,500 0 4,750 0 0 0 4,750 Cash rent 30,000 0 15,000 0 0 0 15,000 Hired labor 1,500 0 500 500 500 0 0 Repairs and upkeep 12,000 1,200 2,400 2,400 2,400 2,400 1,200 Fuel and lubrication 17,258 2,876 2,876 2,876 2,876 2,876 2,876 Other fixed expenses 0 0 0 0 0 0 0 Equipment lease payments 0 0 0 0 0 0 0

Purchases of Capital Assets 12,000 12,000 0 0 0 0 0

Financing Accounts payable 0 0 0 0 0 0 0 Short term notes due 0 0 0 0 0 0 0 Term loan payments 63,361 46,214 17,147 0 0 0 0

Nonfarm Expenditures Family living expenses 0 0 0 0 0 0 0 Nonfarm investments 0 0 0 0 0 0 0

Total Cash Outflows 243,767 62,541 72,522 38,288 19,933 9,321 41,163

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

SUMMARY Total for January March May July September NovemberYear February April June August October December

Net Cash Flow 21,517 (21,171) (36,125) 6,446 (17,136) (6,524) 96,026Beginning cash balance 15,000 15,000 1,854 1,732 8,181 8,059 8,549Interest earned on cash balance 72 25 3 3 14 13 14

New operating loan received 68,000 8,000 36,000 17,000 7,000Repayment of operating loan 90,000 90,000Interest paid on oper. loan balance 6,545 0 0 0 0 0 6,545Ending cash balance 8,044 1,854 1,732 8,181 8,059 8,549 8,044

Operating Loan Balance Beginning Balance 56,000 56,000 64,000 100,000 100,000 117,000 124,000 Ending Balance 34,000 64,000 100,000 100,000 117,000 124,000 34,000

Happy Budgeting!