AGEC 407

Cash Flow Budgeting

• What is a cash flow budget?– Summary of cash inflows and outflows for a business

over a given period of time

– Most important means of financial monitoring

• What is the purpose of a cash flow budget?– Estimate amount and timing of future borrowing

needs

– Estimate ability to repay loans on time

– Monitor finances and detect problems early

AGEC 407

Cash Flow Budgeting

• Important differences between Cash Flow Budget and Income Statement– Must include all cash flows– Does not include non-cash items– Includes non-farm and personal cash flows– Completed on a monthly basis

AGEC 407

Cash Flow Budgeting

• Sources of cash– Beginning cash balance– Farm product sales or services– Capital sales– Non-business cash receipts– New borrowed capital

AGEC 407

Cash Flow Budgeting

• Uses of cash– Farm operating expenses– Capital purchases– Non-business and personal expenses– Principal payments on debt

AGEC 407

Cash Flow Budgeting

• Importance of the cash flow budget:– Monitor cash flows throughout the year– Project borrowing needs and repayment

schedules– May suggest ways to minimize borrowing

needs– Help to balance current vs. non-current debt– Help conduct investment feasibility analysis

AGEC 407

Cash Flow Budgeting

• To construct a cash flow budget:– List all cash inflows and outflows by month– Inflows minus outflows give the ending cash

balance– Ending cash balance becomes beginning cash

balance for next period

AGEC 407

Cash Flow Summary

Cash farm receipts

(+) Capital sales

(+) Non-farm Income

(-) Cash farm expenses

(-) Principal payments on debt

(-) Family living withdrawals

(=) Cash Available

AGEC 407

Cash Flow Budgeting

• Investment feasibility analysis– Will new investment generate enough

additional cash to meet its cash requirements?– Is it financially feasible?– If not feasible on its own, is there enough

positive cash flow from other parts of the business to help make it feasible?

AGEC 407

Cash Flow Budgeting

• Can a farm have positive cash flow and negative NFIFO?– Increasing debt– Use up capital resources– Reduce inventories– Non-farm income– Little or no debt– Low family withdrawls

AGEC 407

Cash Flow Budgeting

• Can a farm have positive NFIFO and negative cash flow?– Rapid farm growth– Rapid debt reduction– Large family withdrawls

AGEC 407

Cash Flow Budgeting

• Don’t use cash flow budget to estimate profitability

• Don’t let a positive cash flow “hide” a negative profit