I F A R MANAGEMENT CAN YOU AFFORD TO FARM? Alan W. Strock Multicounty Farm Management Agent Lancaster, Chester And Portions Of Berks County Cash Flow Budgets Do you really know what stan dard of living your farm business can provide you? If not, then pre pare a farm cash flow projection to find out. Cash management is the use of cash flow budgets and cash flow statements to measure and project the movement of cash, personal and business, in and out of your business. An accurate cash flow will reveal a plan’s financial feasibility. An accurate cash flow projec tion is like a road map and will help you chart your course for the forseeable future. Why Do It? Why should you take time to figure out a cash flow budget and/ or cash flow statement? Because the more control you have over your cash flow, the more profitable your business will be. A dozen other reasons to create your cash flow projection are to: • Show the seasonal timing of cash in and out of the business. • Show lenders the loan repay ment capacity of your business, especially in times of transition. • Reveal if there is enough cash from the business to support an investment in capital, or should borrowed funds be used. • Measure your farm business' • Agricultural • Commercial • Residential • Retaining Walls • Bunker Silos • Manure Storage, Etc. LET OUR EXPERIENCE WORK FOR YOU ESTABLISHED SINCE 1979! WE ORIGINATED THE CONCRETE SYSTEM! Sizes And Layouts To Your Specifications We Work Hard For Customer Satisfaction! ability to meet its obligations, such as cash expenses, debt repayment, taxes, family living and capital investments (equipment, machin ery, and breeding livestock). • Determine the timing and lim it for your line of credit. • Act as a budgeting aide to limit personal and farm expenses. Don’t just spend until the income is gone. • Reveal the farm business’s ability to support family living requirements. • Reveal if there is enough cash being generated to maintain or increase the capital assets. • Compare to prior year’s state ments to reveal management problems. • Help in formulating your marketing plan, so income match es expenses. • Meet a requirement of a first time borrower. • Provide information about the liquidity of the farm. What Is It? A cash flow statement measures the liquidity of a farm business. Liquidity is a measure to see if a farm business is generating enough cash from normal opera tions to meet all obligations of the business, i.e., cash expenses, debt repayment, taxes, family living, and capital investments (equip ment, machinery, breeding livestock). The cash flow statement is very helpful as a financial analysis tool when used with the income state ment and balance sheet to deter mine total financial health. Cash Flow Vs. Profitability Remember, cash flow is not a measure of profitability. Commodity Bins And Trench Silos Authorized Dealer For KEYSTONE CONCRETE PRODUCTS • Hog & • Trench Cattle Silo Slats Walls • H-Bunks • J-Bunks Accounts such as inventory, accounts payable and receivable, and depreciation used to calcu late a farm’s profitability are not used in a true cash flow projec tion. That is why a farm that easily pays its bills may not be very profitable. Bills Get Paid But No Profit The profit and loss statement may indicate the farm business is generating little or no profit but there is still no problem. Paying bills in a timely manner. The following are six scenarios where the farm isn’t profitable but the bills are paid in a timely fashion; 1. Little or no debt, so no princi pal payments are to be made from cash income. 2. Increasing debt, line of credit, or payables. Your farm venders or bank is paying your cash operating expenses. 3. Living off inventories. Inven tory sales creates cash flow, but your spending the prior year’s profits. 4. Living off depreciation. Tax depreciation exceeds new capital investments and principal pay ments. A day of reckoning comes when the machinery wears out. 5. Low family withdrawals. 6. Living expenses provided by off-farm wages. Profitable, But Bills Don’t Get Paid The income statement (profit and loss statement) may indicate the farm business is generating a reasonable profit, but there is still a cash problem. How can that be? Here are five scenarios where this can occur; 1. Fast farm growth. Inventories are growing along with net worth, but these inventories are not gener ating any income. 2. Rapid paydown of debt Prin cipal payments greatly exceed depreciation, and the majority of debt is short term. 3. Large family withdrawals. Family living exceeds farm profits either large unexpected family expenses or not living within the budget. INC. 430 Concrete Ave., Leola, PA 717-656-2016 Lancaster Farming, Saturday, March 27, 1993-C3 4. Unusual conditions. High inventory prices, or high crop yields, but crops were not sold by years end. 5. High income and social sec urity taxes. Taxes come due the same time as spring crop expenses. Monthly Cash Flow Budgets The cash flow budget most com monly used by farmers is the year ly budget broken down by month. The cash flow budget looks like a calendar with income and expense categories that projects each month’s cash inflow and outflow from business operations, personal sources, financing activities (new loans and repayments), invest ments in capital assets, and family living. For Example: January shows a cash surplus of $3,000. April shows a cash deficit of $3,000. The money could be invested, short term, at 4 percent interest for 90 days and gain $3O interest. It will then be used during the April cash deficit time avoiding possible financing and adding $3O to the cash inflow. Thirty dollars does not seem like Winter Convention WINAMAC, Ind. The Inter national Harvester Collectors Club, a not-forprofit organization, was formed here in July 1990 to preserve the history of Interna tional Harvester Co. The club started with 200 mem bers in July of 1990 and now has more than 2,300 members and growing strong. The second an nual meeting was held at Edger ton, Wis. in September 1991 and the third annual meeting was held in June of 1992 at Marion, Ohio. The fourth meeting will be held this year at the Missouri River Valley Steam Engine Show at Booneville, Mo. on Sept. 9-12. Plans are to make this display the largest gathering of International Harvester Equipment, tractors, and memorabilia in the country. The International Harvester a lot of money, but it will add up when this might be done several times throughout the year, espe cially if the amount is larger than $3,000. The cash flow budget adds to the timeliness of the farm busi ness and improves efficiency in cash management Just Do It! 1 strongly suggest that you take time to prepare and analyze a cash flow budget as well as a cash flow statement for your farm business. By annually creating a cash flow projection and then comparing that projection to the actual results, you will be able to set realistic debt repayment, capital purchase, and family withdrawal goals for your farm. You will establish the standard of living your farm can afford your family. For Assistance If you would like assistance doing this or have any questions regarding this and other farm man agement issues, contact your local Penn Stale Extension Office. In today’s agricultural eco nomy, every measure that can improve farm profitability is worth the time investment. Collector Club held their first an nual winter convention at the Hollidome Holiday Inn in Elgin, 111. Feb. 26-28. It was sponsored by the Illinois Chapter #2 of the club. The meeting was attended by approximately 1,000 people and 30 vender tables with I H parts, toys, literature, and memorabilia. Several IH retirees attended the convention, demonstrations, and the evening buffet banquet. There were buses that took the ladies to several shopping malls, pottery shop, and craft displays, which were well attended. For more information of the club, contact Clyde Berkshire, Box 237, Royal Center, IN 46978, (219) 643-3115, or write the Inter national Harvester Collectors, R.R.2, Box 286, Wmamac, IN 46996.
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