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Cash Flow Budgeting -- A Valuable Farm Financial Management Practice

John Hanchar, Farm Business Management
Northwest New York Dairy, Livestock & Field Crops

Last Modified: July 5, 2013

Introduction
Less favorable input, output price relationships, for example, rising feed prices relative to prices received for milk, livestock and other livestock products, will likely challenge farm business owners' abilities to achieve financial objectives over the next several months. Knowing where the business might be financially given less favorable conditions is a valuable first step in meeting the challenge. Budgets estimate future financial condition or performance.

"Farmers who use written calculations or a computer spreadsheet to make a cash flow budget had a much greater ROA (rate of return on assets with appreciation [a profit measure]) than those who did not use these techniques. ... This provides evidence that there are positive returns to detailed financial analyses." (Gloy, Brent A., Eddy L. LaDue, and Kevin Youngblood. 2002. Financial Management Practices of New York Dairy Farms.)

Budgets
For farm business owners, most budgeting work focuses on estimating expected effects on profit, and on projecting the business' ability to meet cash obligations in a timely manner.

Key characteristics of budgets when facing unfavorable input, output price relationships include the following.

  • Budgeting helps you see what a future period's financial performance will look like for planning purposes. A budget allows one to project cash flow shortages, plan borrowings, and determine the ability to repay borrowings.
  • Budgeting provides the manager with a tool for assessing how well the business is meeting projections, and to identify and correct potential problems.
  • Budgets help the farm business owner communicate to others where the business is headed financially.

Examples of budgets include: partial, enterprise, and whole farm budgets for projecting expected effects on profitability and for projecting expected effects on the business' ability to meet cash obligations; and capital budgets associated with investment analysis. Income statements or cash flow statements that report a past period's performance, for example, an income statement for the 2011 calendar year, are not examples of budgets. They report actual past performance, and do not project or estimate future financial performance.

Whole Farm Budgets
A whole farm budget examining profitability summarizes expected income, expenses, and profit. A cash flow budget for projecting the business' ability to meet cash obligations is a summary of the expected cash inflows (cash farm receipts, money borrowed, capital sales, non farm income) and outflows (cash farm expenses, principal payments, capital purchases, withdrawals for family living and other personal withdrawals).

Characteristics include the following.

  • Whole farm budgets consider all items including those that are not expected to change from the current, base period to the future period. For example, a cash flow budget projects what the cash flow statement will look like in a future period and reports total values for all inflow and outflow items.
  • The most useful, valid projections are obtained when proper procedures are used. LaDue, Schuelke and Mensah-Dartey offer some basic rules to follow to insure useful projections (LaDue, Eddy L., Jacob Schuelke and Virgil Mensah-Dartey. 2000. CASHPRO: A Computer Spreadsheet for Projecting Annual Cash Flows and Pro Forma Income Statements.)

1. Project cash flows from accrual (or accrual adjusted) receipt and expense values.2. Exclude unusual occurrences from the base year data used for projections.
3. Use causal logic in estimating each receipt and expense item.
4. Be sure to adjust for inflation.
5. Livestock farms that grow forages or concentrates should carefully assess their forage and, or concentrate balance whenever significant changes are expected in the size or composition of the animal herd or cropping program.
  • Conducting sensitivity analysis and seeking critical review of the projections enhance the usefulness and validity of projections.

The CASHPRO electronic spreadsheet with instructions is available at http://agfinancedyson.cornell.edu/tools.html. Monthly, whole farm, cash flow budgeting is also an option. Again, see http://agfinancedyson.cornell.edu/tools.html for a monthly cash flow budgeting tool.


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Upcoming Events

Pasture Walk - Wild Geese Farm - Franklinville, NY

August 21, 2019
5:30pm - 8:30pm
Fanklinville, NY

Topics to include: Tools for Managing Rotational Grazed Pasture, Weed ID and Management and Calculating Cost of Production. 
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Bovine Reproduction and AI Training Course

September 24 - September 25, 2019
9:30am - 3:30pm
Shortsville, NY

This two-day AI workshop will be held on September 24 and 25. 

Topics covered will include:

• Reproductive Physiology
• Synchronization Protocols
• Heat Detection
• Artificial Insemination
• Proper Thawing of Semen
• Loading A.I. guns
• Practice Breeding Cows

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Corn Congress - Batavia Location

Event Offers DEC Credits

January 8, 2020
10:00 a.m. - 3:00 p.m.
Batavia, NY

Please join the NWNY Dairy, Livestock and Field Crop Program's team for our annual Corn Congress.  DEC re-certification points and Certified Crop Adviser credits available, so bring your picture ID.  Lunch is included.  Hear from program-related professionals and visit with our sponsoring vendors.  
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Announcements

2019 NY Corn & Soybean Yield Contests - Entries Due 8/30/19

The annual corn and soybean yield contests sponsored by the New York Corn & Soybean Growers Association are underway. Click Here for the 2019 yield contest entry form.  This form and contest rules can also be found on the NY Corn & Soybean Growers Association web page at: https://nycornsoy.org/ 

Entry forms must be postmarked by Friday, August 30 and mailed or emailed to Mike Stanyard. Cost is $30 per entry. Good Luck! 


Preventing Sexual Harassment on Farms

If you're wondering how to get your farm business in compliance with NYS Sexual Harassment Regulations, you've come to the right place.  This is a recording of the presentations given at the live training on July 30 and July 31, 2019 across New York State, which provides updates and farm-specific resources developed by CCE. View the recording here: https://youtu.be/_1IjmAj1Nb8.

RMA Announces Additional One-time Changes to Prevented Planting Provisions

June 29, 2019

RMA Announces Additional One-time Changes to Prevented Planting Provisions
for 2019 Crop Year

In response to delayed and prevented planting resulting from above average rainfall and wetness, the USDA Risk Management Agency has made a one-time change to the 2019 crop year prevented planting rules that effectively allows silage corn, if planted as a cover crop following local agricultural expert guidelines, to be acceptable as a post-prevented planting cover crop. Under this one-time rule change, producers are allowed to produce this crop while retaining their prevented planting payment. This change couples with previously announced one-time changes to the prevented planting rules - including expanded acceptable uses for post-prevented planting cover crops and a change in the cover crop haying and grazing start date rule - serve to help those struggling to meet their forage needs due to the weather.

Read the full article from the New York Crop Insurance Education Program.

The USDA-RMA states that "For crop insurance purposes, a cover crop is a crop generally recognized by agricultural experts as agronomically sound for the area for erosion control or other purposes related to conservation or soil improvement." PRO-DAIRY specialists Joe Lawrence and Karl Czymmek and Dr. Quirine Ketterings, Professor and Director of Cornell Nutrient Management Spear Program have released a letter stating "Corn on Prevented Planting acres meets these objectives."


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