Cash Flow Budgeting 1 Author Information - PowerPoint Presentation

1. Cash Flow Budgeting1Author InformationKevin BernhardtFarm Management Specialist, UW-Extension and Center for Dairy ProfitabilityandProfessor of Agri-Business, UW-Platteville School of AgQuestions:608-342-1365bernhark@uwplatt.edu

2. What is a Cash Flow BudgetSummary of projected/planned inflows and outflows of cashKey word is “cash”If cash is not exchanging hands it does not go on the cash flow budget2

3. Why a Cash Flow BudgetWhy Spend Valuable Management Time?Three Primary ReasonsForces the planning function of management. Have to know:input amounts and priceslabor needsexpected production and pricescapital investment plansborrowing needsdebt repaymentinvestment plans3

4. Why a Cash Flow BudgetWhy Spend Valuable Management Time?Three Primary ReasonsCommunication/planning with your lenderSetting up lines of creditCapital investmentsReduce surprises4

5. Why a Cash Flow BudgetWhy Spend Valuable Management Time?Three Primary ReasonsDuring poor profitability times, Cash Flow is the Focus!Cash flow gets the business to the other side of the profitability crisis5

6. + Cash Inflow from operations + Capital asset sales + Non-farm sources – Cash Outflow from operations – Capital asset purchases – Non-farm outflows – Scheduled debt payments + New Borrowing = Final Net Cash Flow Cash Flow Structure6

7. Cash Flow ≠ Income StatementCash flow does not includeDepreciationInventory changesAccts payable/receivable changesCash flow does includePrincipal paymentsCash payments for capital assetsNew loan proceeds7You can cash flow very nicely while going broke (think capital asset sales or accts payable)

8. Cash Flow ≠ Enterprise BudgetCash flow does not includeDepreciationOpportunity costs8

9. Quiz Time9

10. My cash flow budget is a positive $75,000, which means if all goes according to plan I will have a profitable year.TrueFalse10

11. Depreciation is a “real” cost that reflects the loss in value of a capital asset due to wear, tear, and obsolescence. However, it is a non-cash cost so it should NOT be on the cash flow budget.TrueFalse11

12. Milk Sales?Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow12

13. Son’s car insurance payment?13Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

14. Depreciation costs?14Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

15. Sale of tractor?15Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

16. Aunt Hazel’s million dollar inheritance?16Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

17. Mortgage Payment?17Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

18. Cost of new milking parlor?18Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

19. Short-term operating loan?19Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

20. Seed purchased on credit from input supplier?20Inflow from farm operationsInflow from capital asset salesInflow from non-farm sourcesOutflow for farm operationsOutflow for capital asset purchasesOutflow for non-farm reasonsDebt paymentNew borrowingNot on cash flow

21. So What? Why Waste Time on Cash Flow Budgeting? What’s the Value?21

22. Value of a Cash FlowAs part of completing their cash flow, J&J Dairy Farms were forced to analyze price expectations (current situation, forecasts, etc.) Prices will have a life of their own, but there were strong signals of potential declines in the coming year.Their work led to marketing decisions to protect a price22

23. Value of a Cash FlowS&S Grain LLC knew that they had to replace their combine soon. Completing the cash flow forced them to plan what the net purchase cost would be, when in the year would likely be a good time for the purchase and how much new borrowing would be needed.They communicated their plans with their lender well before the year started.The conversation led to an idea of exploring leasing.Ultimately, they decided against leasing, but did work out ways to do some additional custom harvesting to help self-liquidate the loan23

24. B&B Grain and Livestock Company completed their cash flow in December for the following year (see below)241st2nd3rd4thBeginning Cash010,000119,000109,000Total Cash Inflows200,000255,000175,000180,000Total Cash Outflows & Debt Pmts(294,000)(146,000)(185,000)(310,000)Net Cash Flow Before Borrowing(94,000)119,000109,000(21,000)New Borrowing104,0000031,000Net Cash Flow10,000119,000109,00010,000

25. Value of a Cash FlowB&B Grain and Livestock estimate a $94,000 short fall of cash in the 1st quarter and smaller shortfall in the 4th quarter.However, they plan to have fed cattle ready for sale in the 2nd quarter resulting in excess cash in the 2nd and 3rd quartersThey communicate with their lender and work out a operating line of credit to cover their expected shortfalls and a short-term investment strategy for the 6 months of excess cashSure nice to have all the documentation done and ready to go when the new year hits!25

26. Value of a Cash FlowBella Acres Dairy new they were facing a tough year. The market was oversupplied, and all forecasts called for low prices. They had good cows, good facilities, etc., but just needed a way to get through the year.They dissected their Cash Flow budget looking for ways to increase cash inflows and decrease cash outflows. It was a challenge, but they held off some planned capital purchases, sold an older planter and tractor, negotiated a lower lease payment on some land and restructured some debt. 26

27. Increase inflows, decrease outflows: + Cash Inflow from operations + Capital asset sales + Non-farm sources – Cash Outflow from operations – Capital asset purchases – Non-farm outflows – Scheduled debt payments + New Borrowing = Final Cash Flow How To Increase Cash Flow27

28. How to Increase Cash Flow+ Increase Cash Inflow from operations Greater production efficiencyBetter price/marketingSell inventory tax consequencesBenefit/cost of culling decisionsCustom work28

29. How to Increase Cash Flow+ Capital asset sales (tractors, land, cows)Sell capital assets particularly under-performing onesCreates new cash flowLose future potential income from use of that assetTax consequencesOutsource activities and sell associated assetsSell combine and custom-hire combining Sell low profitability enterprisesDo you have non-productive or under-performing assets/activities/enterprises that are not pulling their weightTax consequences29

30. How to Increase Cash Flow+ Increase income from non-farm sources Off-farm incomeSale of non-farm assetsNew/Additional family contributionInvestor partnerAgritourism, hunting fees, horse boarding, storage for boats and campers30

31. How to Increase Cash Flow– Reduce Cash Outflow from operationsReduce variable costs (feed, seed, fertilizer, custom hire, etc.)Negotiate a lower priceCheaper ration ingredientsBetter feed managementVariable rate applicationReduce Labor costs Reduce Land costsNegotiate contractsCollaboration (bulk buying, shared field work, manure fertilizer, shared machinery, etc.)31Be careful to not reduce revenues by more than reduced costs

32. How to Increase Cash Flow– Delay/Reduce capital asset purchases Cost-benefit via repairsShort-term custom hireLeaseCollaborative swop (machinery, labor, combination)Negotiation (sell it for less or don’t sell it to me!)32

33. How to Increase Cash Flow– Reduce non-farm outflows Family living withdrawalAny “Family bonuses” not related to farm operationsEntertainmentRepairs to non-farm assetsInsuranceChristmas bonusRoom and BoardTractor pulling expenses33

34. How to Increase Cash Flow– Reduce scheduled debt payments Re-structure and lengthen amortizationInterest only paymentsDebt consolidationBe wary of mixing debt purposeNegotiate Lower interest ratePrincipal write-offLonger amortization34“Negotiate” means both parties get something for their troubles!!- Additional collateral- Marketing planRisk Mgt planCo-signor

35. How to Increase Cash Flow+ New Borrowing Re-structure and borrow additional against equityNew/Additional operating line of credit35

36. Cash Flow Budgeting – How?-- 8 Steps --ConstructionDetermine boundaries of the farm businessEstimate/Plan operationsEstimate/Plan capital asset sales and purchasesEstimate/Plan non-farm income and expensesDetermine scheduled debt serviceAnalysis and Informing Management DecisionsAnalyze “Cash Position” before new borrowingDevelop a borrowing, repayment and investment planMonitor variances from actual and adjust remainder of the year36

37. Any Questions?37

38. End of Cash Flow PresentationOptional is Further Explanation of the 8-Step Process38

39. Cash Flow ProcessIn 8 Easy Steps39

40. Cash Flow Budget ConstructionDetermine the boundaries of the businessThe boundaries of the cash flow budget might not stop at the same place as the income statement.If personal and other non-farm sources will be used to pay bills then it belongs on the cash flow budget. Even if the plan is to pay it back then both the inflow and outflow should be part of the cash flow budget. 40

41. Cash Flow Budget ConstructionEstimate/Plan Operation Inflows and OutflowsOperating receipts Production (acres, head, yields, etc.)Other expected operating revenues (government payments, crop insurance, custom work, etc.)Operating expenses Direct inputs (feed, seed, fertilizer, etc.)Indirect inputs (labor, utilities, real estate taxes, supplies, etc.41

42. Cash Flow Budget ConstructionEstimate/Plan capital asset sales and purchases Breeding livestockMachinery and equipmentLand BuildingsEstimate/Plan non-farm inflows/outflows of cash Potential Inflows Potential OutflowsOff-farm wages - Family living withdrawalInterest and dividends - Other investment outflowsOther investment inflows - TaxesContributed capital42

43. Cash Flow Budget ConstructionDetermine scheduled debt serviceTerm Debt: Amount and timing of scheduled principal and interest paymentsCarryover Operating Debt:Amount and timing of repayment of carryover operating debt, principal and interest.43

44. AnalysisInforming Management DecisionsAnalyze the “Cash Position” before any new borrowingWhen is cash short and how much When is there excess cash and how muchCan inflows and outflows be changed (timing and/or amount) to cover periods of short cashWhy pay interest if I don’t have to!Stress test “Initial Cash Position” to changes in prices, production or other estimates (what’s my risk)44

45. AnalysisInforming Management DecisionsDevelop a borrowing, repayment and investment plan Determine timing, amount and type of borrowing needs that result in a positive cash flow each period Determine timing and amount of repayment in each periodDetermine timing, amount and type of investing excess cashFurther debt repaymentshort-term investment45

46. AnalysisInforming Management DecisionsMonitor variances and adjust remainder of yearCompare what actually occurred to what was planned and adjust the remainder of the budget accordinglyPlan for positive cash flowImplement the plan46