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Farm Management

Farm Management. Chapter 13 Cash Flow Budgeting. 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. Chapter Objectives.

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Farm Management

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  1. Farm Management Chapter 13 Cash Flow Budgeting

  2. 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

  3. Chapter Objectives • To identify cash flow budgeting as a tool for decision making and analysis • To understand the structure and components of a cash flow budget • To illustrate the procedure for completing a cash flow budget • To describe similarities and differences between a cash flow budget and an income statement • To discuss the uses of a cash flow budget • To show the use of cash flow budgeting in investment analysis

  4. 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.

  5. Figure 13-1Illustration of cash flows

  6. 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.

  7. Table 13-1Simplified Cash Flow Budget

  8. Constructing a Cash Flow Budget • Develop a whole-farm plan • Take inventory • Estimate crop production and livestock feed requirements • Estimate cash receipts from livestock • Estimate cash crop sales

  9. Constructing a Cash Flow Budget (continued) • Estimate other cash income • Estimate cash farm operating expenses • Estimate personal and nonfarm cash expenses • Estimate purchases and sales of capital assets • Find and record the scheduled principal and interest payments on existing debts

  10. Table 13-2Form for a Cash Flow Budget

  11. Table 13-2 (continued)Form for a Cash Flow Budget

  12. Table 13-3Example of a Cash Flow Budget

  13. Table 13-3 (continued)Example of a Cash Flow Budget

  14. Calculating Interest Due

  15. Uses for a Cash Flow Budget • Plan borrowing and debt repayment • Suggest ways to minimize borrowing • Combine business and personal financial affairs into one complete plan • Help establish realistic line of credit • Plan purchases to obtain discounts • Aid tax planning • Find imbalances between current and noncurrent debt

  16. 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.

  17. Table 13-4A Form for Monitoring Cash Flows

  18. 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?

  19. Table 13-5Cash Flow Analysis for an Irrigation Investment

  20. 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.

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