Cash flow budgets Cash and Cash Flow Budgets

Cash flow budgets

Cash and Cash Flow Budgets These can be considered under: � Historic Cash Flows (Cash Flow Statement) � Budgeted Cash Flows � Cash Flow Control

Historic Cash Flows A cash flow statement summarizes cash receipt and payments recorded in the cash book/journals. It is a straight forward mechanical procedure. Monthly totals for each item or class of receipt and payment are transferred to a prepared form.

Historic Cash Flows �A cash flow statement is essential for the preparation of budgeted cash flows. � If the control procedures recommended later are followed it should be readily available. The format and headings should match your cash flow budget.

Cash Flow Budgets �A cash flow budget is a financial plan which sets down when expected cash income will be received and when expenses will be paid. Receipts minus payments will give the cash surplus or deficit for the period.

Cash Flow Budgets Receipts & Payments may be set out: � monthly � two monthly � quarterly � or for any other period

Reasons for doing a cash flow budget 1 2 3 Before it can be done a whole farm plan is necessary, so it expands the operator’s knowledge of the business. It tests the farm plan(s) to evaluate whether the cash income will meet expenses NB it does not test profitability. If the timing of inflows and outflows are not compatible the budget indicates loan requirements. Loan repayments can be allowed for.

Reasons for doing a cash flow budget: 4 5 Allows control (see later) It is an indispensable aid in communicating needs to lending institutions.

Preparing a cash flow budget: 1 2 3 4 Construct a whole farm plan. This includes crop and/or livestock production plans. Take an inventory of resources and products on hand gives inputs on hand livestock on hand volume of crops/products stored Estimate production requirements Estimate yields (crop or livestock)

Preparing a cash flow budget: � Estimate sales (yield x price) � Estimate other income � Estimate expenditure Crop Stock Other operating Non-operating (interest) Capital Personal

Preparing a cash flow budget: � Project timing of receipts and expenditure � Determine net cash flow and cumulative net cash flow � Calculate interest on overdraft and cash flow after interest

Analysing the cash flow budget 1. Examine the annual cash surplus. Should it be unsatisfactory the following adjustments can be made: � sell more current assets (crops or livestock) � finance capital expenditure with alternative credit or postpone. � convert short term debts to medium or long term debts. � re-negotiate existing loan repayments � reduce non-farm expenditure or increase non-farm income � sell non-current (working or fixed) assets.

Analysing the cash flow budget 2. Examine monthly surplus/deficits Months of peak debt are critical and must be compared with credit limits. Adjustments may have to be made eg: � shift timing of some sales � change timing of some expenditures � increase short term borrowing or organise alternative financing. � re-negotiate timing of debt repayments.

Cash flow budget revision and control

Cash flow budget revision and control �A budget once made is not unalterable, things rarely go as planned. You must monitor performance to determine when and if changes are needed. � Comparing actual with budget will do this and has the advantage of producing a cash flow statement at the same time

� There is often a problem with the timing of receipts and payments differing slightly from budget. This can be overcome by using bi-monthly or quarterly control sheets. Quarterly Control Sheet: � The same basic form may be used with the headings altered. It indicates if any items were under or over estimated. Significant discrepancies require a full revision of the budget.

Budget Revision � The aim of a cash flow budget is to predict the level and timing of peak debts and surpluses so that plans can be made. As the year progresses you have more information, hence can make more accurate predictions. Budget revisions should be every three months or more often in cases of liquidity crisis or wide fluctuations in income. They may also be timed to occur after major operations such as pruning or harvest.