Answer:

FALSE! depends on where the cash came from. Cash flow budget is not the same thing as the income statement

Answer:

TRUE! Only actual cash inflows and outflows go on the cash flow budget)

1. Seed purchased on credit from input supplier
2. Aunt Hazel’ 100K inheritance
3. Purchase of new bulk tank

Answer:

1. Seed purchased on credit from input supplier (No)
2. Aunt Hazel’ 100K inheritance (It depends. If used to pay cash expenses, yes.)
3. Purchase of new bulk tank (yes assuming cash expense)

J&J Dairy Farms is an example of the value of being “forced” to plan operations in the next year.  To complete their cash flow, J&J Dairy had to estimate what price they would receive for their milk.  It forced them to consult with market advisors, assess where in the cycle the industry was at, look at futures and consider the current supply and demand situation.  No one knows what could happen to prices especially a year out, but J&J saw several indicators that the risk of price movement looked to be towards lower prices.  It caused them to consider and pull the trigger on some marketing actions to secure the prices available today for a portion of their expected production.  It also gave them a benchmark to watch as the year unfolds.  Just the process of completing the cash flow budget led them to market planning as well.

S&S Grain LLC is another example of the value of planning resulting from the cash flow budgeting process.  S&S Grain knows they have to replace their combine this next year.  The cash flow budget enables them to plan ahead for the best time to trade and also communicate far in advance with their lender what their borrowing needs will be.  They also will have knowledge of the impact on cash and knowing that helps in shopping and negotiations.

B&B Grain and Livestock Company has a meeting with their lender next week regarding borrowing needs for the year ahead.  B&B has completed their cash flow budget and thus they know that barring significant changes in the shocks of life they will have need for short-term borrowing needs in the 1^st, 3^rd and 4^th quarters.  But, they will have a significant surplus of cash in the 2^nd quarter when they sell their cattle.  So, they have two discussions they want to have with their lender.  One is setting up an operating line of credit and repayment terms for the times of cash shortfalls.  Second is what is the optimal use of the cash surplus when they have it.  Should they pay off debt ahead of time and save interest or should they invest it and earn some interest.  It will be nice to head into the year knowing and already have ready the borrowing and investment needs.

One way to increase cash flow is increasing normal operational sales.  Areas to consider include production, price and new or more enterprise activities.  Increasing custom work and selling market inventory if it is available are two ways to increase cash flow.

More impactful is generating greater revenues from the primary source of income (milk, grain, feeders, etc.).  Revenue is from production multiplied by price.  Therefore, an increase in production and/or price increase cash inflows.  In order for net cash flow to be greater increasing production or price must be relatively greater than any associated costs.

Benchmarking your operation may be a way to determine if there is potential for greater production efficiency – more milk, more bushels, more calves, etc. per unit of costs.  Feed losses, death loss, conception rates, timeliness of planting, variable rate applications and many other factors might be a means for improving production efficiency.

Marketing may be a means of securing a better price, but marketing tends to be more successful at securing a known price ahead of time versus a “higher” known price ahead of time.  But, it is a tool.  Marketing a value added trait may also be a way to increase sales price.

Selling capital assets is a way to increase cash inflows.  However, it is a double-edged sword – as you sell capital assets you also lose the future income generating capacity of that asset.  For example, you can sell ten cows today and generate cash flow, but then you no longer have those ten cows to generate milk and calves to sell in the future.  Factors to consider include:

• Are there underperforming or underutilized assets?
• Are there activities that can be outsourced for less cost than owning the assets such as hiring a custom harvester and selling the associated harvest equipment
• Are there underperforming enterprises. For example, if you never make any money on the 200 acres of grain you farm then an alternative is to rent the ground out (or sell it) and sell the associated machinery.
• With any of these options, there maybe tax consequences to consider.

Many farm families bring income and cash flow in from non-farm sources.  Off-farm employment is a major source of potential cash flow for the farm business and one that is often not subject to the ebbs and flows of commodity prices and may come with other benefits such as health care and retirement.  Other potential sources of non-farm cash includes

• Contributed capital from family or non-family investors
• Agritourism
• Hunting fees
• Horse boarding
• Storage of boats and campers
• Non-farming enterprises that make use of some farming assets such as
  • Repair/maintenance shop
  • Record-keeping
  • Seed sales
  • Welding shop

A second overall way to increase cash flow is to decrease the cash leaving the farm business.  Decreasing variable costs per unit of production is one means to increase cash flow by reducing cash outflows.  This may be accomplished by:

• Negotiating lower lease payments
• Using cheaper feed ingredients
• Better feed management, less wastage
• Variable rate application
• Early detection health protocols
• Lower labor costs or greater labor productivity
• Collaboration
  • Bulk buying of inputs
  • Shared field work
  • Manure-Fertilizer agreements
  • Shared machinery/equipment
  • Shared labor

The key is assuring that production is not negatively impacted or at least is less negatively impacted than the gain from lower costs.

Can a piece of equipment be held for another year versus trading it this year?  What will the potential repair costs be compared to the new piece?  Can the purchase of an asset be held off in lieu of custom hiring the work done?  Am I cash ahead by leasing versus buying?  If purchase is needed can I negotiate a lower purchase price?

Family living withdrawals are of two types.  One is the “normal” compensation for labor and management that is to be expected from the work provided.  Over and above that is additional withdrawal that drains cash from the operation.  The latter is fine and expected in times of good cash flow.  However, when cash flow is tight, hopefully for the short-term, then a tightening of the belt is a means of increasing net cash flow.  Perhaps the big vacation needs to be put off in lieu of something more local this year.  Remodeling the house, boat purchase and etc. should not be forgotten, just perhaps delayed until times of better cash flow.

Are there “family bonuses” not related to farm operations or compensation that could be eliminated or at least delayed.  Potential examples include:

• Entertainment
• Gas for and repairs of non-farm vehicles
• Insurance premiums
• Room and board
• Costs associated with tractor pulling
• Horses

For many farm businesses, debt service is a major source of cash outflow.  There may be ways to work with creditors to reduce debt service in the short-term.  Examples include:

• Restructuring loan amortizations, that is, lengthen repayment terms, thus reducing current payments
• Interest only payments
• Debt consolidation with a resulting lower current payment
• Lower interest rates
• Principal write-off (unusual and usually associated with much bigger problems than short-term cash flow)

The danger with any of these is that it adds debt service in the future.  For example, an interest-only payment adds principal that must be paid back in the future and with interest.  There is also the danger of accumulating debt service for reasons that are no longer relevant.  For example, consolidating a three-year tractor loan with other debts and lengthening the amortization (pay-back time) using a mortgage or second mortgage may result in paying back loans on that tractor at some point when the tractor no longer exists.  However, in the short-run, these may be ways to increase net cash flow.

Finally, when other avenues have been exhausted the last tool in the box is new borrowing to cover negative cash flow.  In many situations, this is a normal part of the business.  For example, an operating line of credit in a grain operation covers the purchase of seed, fertilizer, and other inputs until the grain is harvested, sold and the operating note is paid back.  Care should be taken to not use operating loans to pay for capital assets.  It is also perfectly normal to increase term debt for capital assets, for example, a three-year term loan for a piece of machinery, fifteen-year for a new building, or twenty-five years for land.