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
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.)
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.
Margin Protection Program for Dairy
September 23, 2014This is your opportunity to learn more about the USDA Margin Protection Program (MPP) for Dairy.
varies by location
Thirteen times at eight different locations across the Northwest New York Region producers will have the opportunity to participate in a live webinar with nationally renowned milk marketing expert, Dr. Andrew Novakovic, from Cornell University, has been part of a National Program on Dairy Markets and Policy Team developing materials to assist farmer in understanding this new program and aid them in deciding how to participate.
2014 Cornell Sheep & Goat Symposium
October 3 - October 4, 2014The 2014 Cornell Sheep & Goat Symposium will be held on Friday afternoon 3 October at the Cornell University Ruminant Center near Harford, NY and Saturday 4 October in Morrison Hall at the Cornell University campus.
Fri 1 pm-5:30 pm, Sat 7:45 am - 6 pm
Harford and Ithaca, NY
BQA in a Day, Beef Quality Assurance Workshop
October 11, 2014Register early! Class size is limited!!
10:00 a.m. - 2:30 p.m.
2014 Cornell Field Crop Guidelines AvailableThe 2014 edition of the Cornell Integrated Field Crop Management Guidelines is available. The Cornell Guide for Integrated Field Crop Management provides up-to-date field crop production and pest management information for New York State. It has been designed as a practical guide for field crop producers, crop consultants, pesticide dealers, and others who advise field crop producers. Crops included in this Guide include field corn, forages, small grains, and soybeans. The cost of this guide is $25 plus shipping. You can order this publication, or other Cornell Guidelines, through Cornell Copperative Extension offices or from the Cornell Store at Cornell University at 800-624-4080.
Social Media, New Tools for ExtensionRapid communication is critical to the success of the agricultural industry. Many farmers use phone, email, and traditional websites every day. However social media such as Facebook, Twitter, YouTube, Google Maps, and blogs are just beginning to be used to share timely information in order broaden the reach of Extension. The NWNY Team is active on a number of these sites. We are on Facebook and new content is posted every week keeping farmers, industry, and the general public informed of current conditions in the field, national issues that impact western New York farms, and informational resources. Google Maps is currently being used to communicate the progress of 15 on-farm research locations in western New York through weekly photo and video uploads. Google Maps also has large potential as an Extension tool, including helping farmers to network in the region in the emerging malting barley industry, precision agriculture adaption, and local hay marketing. The team is also exploring the use of YouTube and Twitter to better serve the region in addition to updating the team's webpage and blogging.
Google Map for the Winter Small Grain Nitrogen Rate Trial: Map