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.
Aurora Farm Field Day
July 16, 2015New York's farming community is invited to learn about the latest research on field crops, soil and pest management during the annual field day at Cornell University's Musgrave Research Farm in Aurora, featuring farm tours, demonstrations and presentations. Hosted by the Integrated Field Crop, Soil, and Pest Management Program Work Team in conjunction with Cornell Cooperative Extension and the Cornell University Agricultural Experiment Station.
9:00 a.m. - 3:00 p.m.
Temple Grandin to visit Ontario County
September 17, 2015The first event featuring Grandin will be hosted by Cornell Cooperative Extension's Northwest New York Dairy, Livestock and Field Crops Team. This presentation will be offered for the farming community. Grandin will give a talk on livestock handling and then lead a farm walk-through to discuss facilities. There will be time after the program for questions & answers with a book signing.
Latest Dairy Market WatchAn educational newsletter to keep producers informed of changing market factors affecting the dairy industry. How to Read Dairy Market Watch. Dairy Market Watch, June 2015 Report.
Deadlines Reminder...The new Farm Bill contains a number of important changes to USDA programs that will impact our farmers. They are outlined below:
The registration period for 2016 coverage for the Dairy Margin Protection Program (MPP) is from July 1 to September 30, 2015.
Farmers who participated in the 2015 program will get an automatic increase to their Production History of 1.0261 or 2.61%. This will allow them to enroll just that much more milk marketing's. For producers who are signing up for the first time, they will get their production History as established according to the original rules, with no adjustment or "bump". The process for establishing a Production History is described in the MPP tools section of www.dairymarkets.org.
Crop CamBe sure to check out Crop Cam for videos made by our Extension agronomists describing crop management practices, identifying pests, and conducting on-farm research across northwestern NY.
2015 Cornell Field Crop Guidelines AvailableThe 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 shipping costs for the printed book.
Cornell Guidelines can be obtained through your local Cornell Cooperative Extension office or from the Cornell Store at Cornell University. To order from the Cornell Store, call (800) 624-4080 or order online at: Cornell Store