Cash Flow Budget Components Farm Business Planning – Lesson 2 A Project Funded by: USDA BFRDP Grant #10506276 Development Partners Include: Mississippi State University National Association of Agricultural Educators Oklahoma State University • Agricultural Economics Department • Oklahoma Cooperative Extension Service Why a Cash Flow Budget? • Cash flow budgets monitor project revenues versus expenses in the short term • Cash flow imbalances can be justified in the long term by normal operation of a business ▫ example – buying growing supplies in the first few months of a crop before ever selling any product • Cash flow budgets are made monthly, quarterly and annually How Cash Flow Budgets Help • Cash budgets help to manage a project by determining what cash resources will be needed and when in order to keep a project running ▫ Example – negative cash flow during feeding out of steers before sale. Need to borrow money from the bank or have other reserves available to feed animals until they are sold. Cash Flow Budgeting • Cash flow budgeting is concerned with FEASIBILITY of an enterprise ▫ Is sufficient cash generated to meet obligations generated by the project? • Long-term investments often have a negative cash flow, e.g., land purchases, until debt is paid ▫ Subsidize cash flow with other enterprises, e.g., off-farm income Cash Sources • Focus is on CASH • Include ALL source of cash and ALL uses of cash • Sources of cash: ▫ Full sale price of land, buildings, machinery, breeding stock, feeder livestock, crops ▫ Government program payments, crop insurance ▫ Starting cash balance ▫ Off-farm income ▫ Gifts & inheritances ▫ Proceeds from planned borrowing Cash Uses • Uses of cash ▫ Cash expenses ▫ Full purchase price of land, buildings, equipment, breeding stock ▫ Principal payments ▫ Interest payments ▫ Family living expenses Cash Flow Analysis • Can a project have positive cash flow but not be profitable? ▫ Yes! ▫ Depreciation is NOT a cash flow but is an expense ▫ So profit can be negative even though project cash flows! • Can a project be profitable but not have positive cash flow? ▫ Yes! ▫ Principal payments are NOT an expense but are a cash demand ▫ So cash flow can be negative while profit > 0! Special Thanks to: • USDA BFRDP Grant Program • Oklahoma State University ▫ Eric A. DeVuyst, Department of Agricultural Economics • National Association of Agricultural Educators