Understanding benefits of completing unattractive tasks often provides the motivation to benefit from otherwise unavailable outcomes. While perhaps not exactly in the same vein as visiting the dentist, the use of financial records falls nicely into the category of experiences often avoided by farm business managers. However, even in the case of a throbbing tooth, many admit relief once the commitment is made to address the situation and realize a bit of preventative maintenance goes a long way towards reduction of personal stress.
What are the benefits of projecting and monitoring Cash Flow (CF)? According to William Edwards, Iowa State University (ISU) Extension Economist, a CF projection, also known as a budget, is useful because it:
-- Encourages you to think through (document) your farming plans for the coming year
-- Test your plans, such as if you will produce enough income to meet expenses and other cash needs
-- Projects how much operating credit you may need and when
-- Projects when loans can be repaid
-- Provides a guide against which you can compare actual cash flows
-- Helps you communicate your farming plans and credit needs with your lenders.
To begin, utilize the information you already have and fill in from there. A listing of your assets and liabilities, inventories and cash income and expenses for the current or most recent year is needed. Use this information along with expected milk prices and input costs along with your personal experience to outline the tentative plan for the year in dollar amounts. What changes in level of production are planned? How much income do you plan to generate and from which sources? Do you expect input costs to increase, decrease or remain the same? In which categories are the changes expected? Is it likely fuel prices may moderate but feed prices will increase and by how much? What do you think milk prices will do over the next year?
Be as accurate as you can with these predictions but don’t get hung up on absolute accuracy. Remember George S. Patten’s admonition that “A good plan, violently executed now, is better than a perfect plan next week.” Success occurs by planning for the most likely assurance then adjusting to reality once it occurs. It helped Patten win WW II, it can help you reach your goals as well.
Don’t forget to figure in capital purchases, sales and major repair costs as well as new borrows and scheduled debt payments. Dr. Edwards suggests, “You may want to stay on the conservative side with your projections since, if they work at this level it’s likely they’re work under better price scenarios”.
Once the annual CF Statement is produced many experts recommend breaking it down into monthly in and out flows in recognition of the natural ebb and flow of both. Monitoring CF monthly opens opportunities for shorter term, on-the-fly management including;
-- Shifting the timing of some sales
-- Shift the timing of some expenditures
-- Increase short-term borrowing in periods with negative CF and project repayment in periods of positive CF. Remember interest needs to be added to principal payments
-- Delay the due date of fixed debt payments to match periods with positive CF.
Cash Flow projection budgeting forms the foundation for proactive business management. Consider it a stress management tool, a quality of life enhancer. How much less stress will you experience when you can identify when negative cash will occur and prepare for them? Think how much easier the visit to the lender or other credit provider can go when you show them you have a plan.
Are you interested in planning for the next swing in volatile milk prices and production inputs? UW-Extension can help you get the job done! Contact your farm records association field staff, technical college farm trainer or local UW-Extension Office. This educational program is support by a North Central Risk Management Education Center Grant.
###
Contact:
Ken Bolton
(715) 877-1420
kenneth.bolton@ces.uwex.edu