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.
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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
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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.
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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.