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Farm Management

Farm Management. Chapter 13 Cash Flow Budgeting. Figure 13-1 Illustration of cash flows. Common Types of Cash Flows. Sunk costs – costs that have accrued in the past Opportunity costs – costs of lost options Side effects Positive side effects – benefits to other projects

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Farm Management

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  1. Farm Management Chapter 13 Cash Flow Budgeting

  2. Figure 13-1Illustration of cash flows

  3. Common Types of Cash Flows • Sunk costs – costs that have accrued in the past • Opportunity costs – costs of lost options • Side effects • Positive side effects – benefits to other projects • Negative side effects – costs to other projects • Changes in net working capital • Financing costs • Taxes

  4. 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.

  5. Table 13-1Simplified Cash Flow Budget

  6. 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

  7. 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

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

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

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

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

  12. Calculating Interest Due

  13. 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

  14. 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.

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

  16. 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?

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

  18. 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.

  19. 1. Why is machinery depreciation not included on a cash flow budget? • Machinery depreciation is a noncash expense and only expenses requiring a cash outflow are included on a cash flow budget. For this reason, a cash flow budget contains no depreciation of any kind.

  20. 2. Identify four sources of cash inflows which would not be included on an income statement but which would be on a cash flow budget. Why are they on the cash flow budget? • Cash received from: 1) new loans, 2) nonfarm income, 3) full sale price of capital assets, and 4) gifts and inheritances. They are on a cash flow budget because they are cash inflows and represent cash, which is or could be available for farm use even though they are not farm business revenues.

  21. 3. Identify four types of cash outflows which would not be included on an income statement but which would be on a cash flow budget. Why are they on the cash flow budget? • Cash used for: 1) principal payments on debt, 2) full purchase price of capital assets, 3) family living expenses and other personal withdrawals, and 4) income and self employment taxes. They are on a cash flow budget because each requires the expenditure of cash but are not farm business expenses.

  22. 4. Identify four noncash entries found on an income statement but not on a cash flow budget • Noncash entries found on an income statement but not on a cash flow budget include: 1) inventory changes, • 2) accounts receivable, 3) accounts payable, and 4) depreciation

  23. 5. Discuss the truth or falsity of the following statement: A cash flow budget is used primarily to show profit from the business. • This statement is false. A cash flow budget should not be used to project profit. Questions 2, 3, and 4 above illustrate some of the major differences between finding net cash flow and net farm income. While a large number of the same items appear on both of these financial documents, there are too many differences to be able to estimate net farm income from a cash flow budget.

  24. Discuss how you would use a cash flow budget when applying for a farm business loan • A cash flow budget is extremely helpful when applying for a loan. It shows why, when, and how much money will be needed. Just as important, it shows if, when, and how much of the loan can be repaid with interest. A lender is interested in both aspects but particularly in the repayment ability shown on the cash flow budget.

  25. 8. A feasible cash flow budget should project a positive cash balance for each month of the year, as well as for the entire year. When making adjustments to the budget to achieve this, should you begin with the annual cash flow or the monthly values? Why

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