Farm Management Chapter 13 Cash Flow Budgeting farm
Farm Management Chapter 13 Cash Flow Budgeting farm management chapter 13
Chapter Outline • • • Features of a Cash Flow Budget Constructing a Cash Flow Budget Uses for a Cash Flow Budget Monitoring Actual Cash Flows Investment Analysis Using a Cash Flow Budget farm management chapter 13 2
Chapter Objectives 1. To identify cash flow budgeting as a tool for decision making and analysis 2. To understand the structure and components of a cash flow budget 3. To illustrate the procedure for completing a cash flow budget 4. To describe similarities and differences between a cash flow budget and an income statement 5. To discuss the uses of a cash flow budget 6. To show the use of cash flow budgeting in investment analysis farm management chapter 13 3
Features of a Cash Flow Budget A cash flow budget is a summary of the projected cash inflows and outflows for a business over a period of time. The time period is usually a future accounting period and is divided into quarters or months. As a forward planning tool, its primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay loans. farm management chapter 13 4
Figure 13 -1 Illustration of cash flows farm management chapter 13 5
Actual versus Estimated Cash Flows A cash flow budget contains estimates of cash flows for a future time period. It is possible to record and organize actual cash flows for some past time period into a Statement of Cash Flows. The actual values can be compared against the budgeted values. Also, this statement can provide insight into the financial structure of the business. farm management chapter 13 6
Table 13 -1 Simplified Cash Flow Budget farm management chapter 13 7
Constructing a Cash Flow Budget 1. Develop a whole-farm plan 2. Take inventory 3. Estimate crop production and livestock feed requirements 4. Estimate cash receipts from livestock 5. Estimate cash crop sales farm management chapter 13 8
Constructing a Cash Flow Budget (continued) 6. Estimate other cash income 7. Estimate cash farm operating expenses 8. Estimate personal and nonfarm cash expenses 9. Estimate purchases and sales of capital assets 10. Find and record the scheduled principal and interest payments on existing debts farm management chapter 13 9
Table 13 -2 Form for a Cash Flow Budget farm management chapter 13 10
Table 13 -2 (continued) Form for a Cash Flow Budget farm management chapter 13 11
Table 13 -3 Example of a Cash Flow Budget 12
Table 13 -3 (continued) Example of a Cash Flow Budget 13
Calculating Interest Due farm management chapter 13 14
Uses for a Cash Flow Budget 1. Plan borrowing and debt repayment 2. Suggest ways to minimize borrowing 3. Combine business and personal financial affairs into one complete plan 4. Help establish realistic line of credit 5. Plan purchases to obtain discounts 6. Aid tax planning 7. Find imbalances between current and noncurrent debt farm management chapter 13 15
Monitoring Actual Cash Flows A cash flow budget can be used for monitoring and control. The budgeted amounts can be compared to what actually transpires. farm management chapter 13 16
Table 13 -4 A Form for Monitoring Cash Flows farm management chapter 13 17
Investment Analysis Using a Cash Flow Budget Will a new investment generate enough cash income to meet its additional cash requirements? In other words, is the investment financially feasible? farm management chapter 13 18
Table 13 -5 Cash Flow Analysis for an Irrigation Investment farm management chapter 13 19
Summary A cash flow budget is a summary of all cash inflows and outflows for a given future time period. No noncash entries are included. This budget can provide an estimate of borrowing needs and repayment capacity. It can also be used to analyze the feasibility of investment alternatives. farm management chapter 13 20
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