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Cash Flow Budgeting -- A Valuable Farm Financial Management Practice

John Hanchar, Farm Business Management
Northwest New York Dairy, Livestock & Field Crops

Last Modified: July 5, 2013

Introduction
Less favorable input, output price relationships, for example, rising feed prices relative to prices received for milk, livestock and other livestock products, will likely challenge farm business owners' abilities to achieve financial objectives over the next several months. Knowing where the business might be financially given less favorable conditions is a valuable first step in meeting the challenge. Budgets estimate future financial condition or performance.

"Farmers who use written calculations or a computer spreadsheet to make a cash flow budget had a much greater ROA (rate of return on assets with appreciation [a profit measure]) than those who did not use these techniques. ... This provides evidence that there are positive returns to detailed financial analyses." (Gloy, Brent A., Eddy L. LaDue, and Kevin Youngblood. 2002. Financial Management Practices of New York Dairy Farms.)

Budgets
For farm business owners, most budgeting work focuses on estimating expected effects on profit, and on projecting the business' ability to meet cash obligations in a timely manner.

Key characteristics of budgets when facing unfavorable input, output price relationships include the following.

  • Budgeting helps you see what a future period's financial performance will look like for planning purposes. A budget allows one to project cash flow shortages, plan borrowings, and determine the ability to repay borrowings.
  • Budgeting provides the manager with a tool for assessing how well the business is meeting projections, and to identify and correct potential problems.
  • Budgets help the farm business owner communicate to others where the business is headed financially.

Examples of budgets include: partial, enterprise, and whole farm budgets for projecting expected effects on profitability and for projecting expected effects on the business' ability to meet cash obligations; and capital budgets associated with investment analysis. Income statements or cash flow statements that report a past period's performance, for example, an income statement for the 2011 calendar year, are not examples of budgets. They report actual past performance, and do not project or estimate future financial performance.

Whole Farm Budgets
A whole farm budget examining profitability summarizes expected income, expenses, and profit. A cash flow budget for projecting the business' ability to meet cash obligations is a summary of the expected cash inflows (cash farm receipts, money borrowed, capital sales, non farm income) and outflows (cash farm expenses, principal payments, capital purchases, withdrawals for family living and other personal withdrawals).

Characteristics include the following.

  • Whole farm budgets consider all items including those that are not expected to change from the current, base period to the future period. For example, a cash flow budget projects what the cash flow statement will look like in a future period and reports total values for all inflow and outflow items.
  • The most useful, valid projections are obtained when proper procedures are used. LaDue, Schuelke and Mensah-Dartey offer some basic rules to follow to insure useful projections (LaDue, Eddy L., Jacob Schuelke and Virgil Mensah-Dartey. 2000. CASHPRO: A Computer Spreadsheet for Projecting Annual Cash Flows and Pro Forma Income Statements.)

1. Project cash flows from accrual (or accrual adjusted) receipt and expense values.
2. Exclude unusual occurrences from the base year data used for projections.
3. Use causal logic in estimating each receipt and expense item.
4. Be sure to adjust for inflation.
5. Livestock farms that grow forages or concentrates should carefully assess their forage and, or concentrate balance whenever significant changes are expected in the size or composition of the animal herd or cropping program.

  • Conducting sensitivity analysis and seeking critical review of the projections enhance the usefulness and validity of projections.

The CASHPRO electronic spreadsheet with instructions is available at http://agfinancedyson.cornell.edu/tools.html. Monthly, whole farm, cash flow budgeting is also an option. Again, see http://agfinancedyson.cornell.edu/tools.html for a monthly cash flow budgeting tool.


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Quality Milk Training - Batavia

January 8 - March 5, 2015
10:30 a.m. - 3:30 p.m.
Batavia, NY

Cornell Cooperative Extension, Pro-Dairy and QMPS will be offering a program this winter focusing on milk quality. Programs will be offered at several locatins and will be available via live presentations and web conferencing.
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Quality Milk Training - Canandaigua

January 8 - March 5, 2015
10:30 a.m. - 3:30 p.m.
Canandaigua, NY

Cornell Cooperative Extension, Pro-Dairy and QMPS will be offering a program this winter focusing on milk quality. Programs will be offered at several locatins and will be available via live presentations and web conferencing.
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Winter Dairy Management - Batavia Location

March 9, 2015
10:00 a.m. - 2:30 p.m.
Batavia, NY

For dairy farmers, the pleasure of historically high milk prices in 2014 has turned into the prospect of significantly lower milk checks for 2015. The component based pricing system for milk offers a means to achieve higher profits with the same level of milk production. Many producers have gained and maintained higher milk components even with Holsteins consistently surpassing the 3.5% BF and 3.0% MP standards.

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Announcements

Deadlines Reminder...

The new Farm Bill contains a number of important changes to USDA programs that will impact our farmers. They are outlined below:

Ag Risk Coverage (ARC) & Price Loss Coverage (PLC) replace the Base Acres programs, leaving the decision of which program to participate in up to the producer. The Agricultural Risk Coverage (ARC) & Price Loss Coverage (PLC) programs are managed by the Farm Service Agency (FSA). Both programs are limited area risk programs, limited because of how little of the producer's risk is covered and will commit your farm for 2014-2018. More information on these choices is provided in the attached Vermont Corn Silage & Grain Corn fact sheet. These are complicated programs that need to be carefully reviewed in order that you make the best choice for your operation by the following dates:

February 27: deadline to update yields and re-allocate bases for ARC/PLC.

March 31: Final date to make an election in the ARC/PLC program.

Contact your county Farm Service Agency (FSA) office for details.

Crop insurance remains as the primary disaster protection that can cover from 50%-85% of your expected crop value in addition to the ARC/PLC programs. This year?s price election for corn silage is $38.50/ton, down from $41.25 in 2014. The cost of your premium is subsidized by the USDA up to 67% and the enterprise unit option can reduce premium costs by as much as 50%. A list of crop insurance agents is enclosed for your convenience. NAP from FSA is available to provide protection up to 65% of the expected value of crops that are not insurable.

March 16: sales closing/policy modification deadline.

Noninsured Crop Disaster Assistance Program (NAP) has been expanded to include higher coverage levels, up to 65% of the crop yield, at 100% of the FSA established prices. NAP offers protection for crops not insured by other RMA policies. Contact your local FSA office for details.

March 16:
deadline to enroll/modify a policy.

Whole Farm Revenue Insurance provides insurance for all commodities on the farm, tied to your Schedule F. Protects specialty and organic crops and livestock and those locally and direct marketed.

March 16: deadline to enroll

Conservation Compliance: In order to receive crop insurance subsidies for 2016 a producer must certify compliance with FSA by June 1, 2015. The registration period for 2016 coverage for the Dairy Margin Protection Program (MPP) is from July 1 to September 30, 2015. Nearly 70% of Vermont's dairy farms now have some form of price protection, either through MPP or Dairy Livestock Gross Margin (LGM) insurance.



Dairy Of Distinction Application

Attractive dairy farms give the consumer greater confidence in the wholesomeness of milk and stimulate milk sales which encourages public support of the dairy industry. The award gives recognition to the dairy farmer for maintaining a well-kept farmstead. To download a copy of the application go to: New York Application

2015 Cornell Field Crop Guidelines Available

The 2015 edition of the Cornell Integrated Field Crop Management Guidelines is available! New for 2015 are three different product options for the Cornell Guidelines. Users can obtain a print copy, online-only access or a package that combines print and online access. The print edition of the 2015 Field Crops Guide is $26 plus shipping. Online-only access is $26. A combination of print and online access costs $36.50 plus shippings costs for the printed book.

Cornell Guidelines can be obtained througy your local Cornell Cooperative Extension office or fromthe Cornell Store at Cornell University. To order from the Cornell Store, call (800) 624-4080 or order online at: Cornell Store

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