The cash flow plan is the focal point of the annual farm planning process. If the cash flow plan is prepared carefully and in sufficient detail, it will provide a financial picture of the operator's enterprise selections, input needs, feed requirements, credit needs and repayment capacity, family living needs, and marketing plans.
To be most useful, the cash flow should be prepared on a projected basis; that is, it should represent a plan for the future. Actual cash flow (farm receipts and expenses) can then be compared with the projection to provide an early check on business progress and an opportunity to make timely adjustments if required.
Cash flow should be prepared on both an annual and monthly basis. The monthly cash flow is of critical importance in determining specific dates when loans are needed, when debt can be repaid, and when inputs will be purchased. The use of the cash flow in estimating amounts and time of financial transactions causes some people to view the document as a whole-farm budget.
The cash flow projection estimates the flow of revenue into the farm business and the flow of expenditures out of the business. Those flows are important because they indicate when cash surpluses or deficiencies will occur.
Cash flow says nothing about profitability of the business; profitability information is available only from the income statement. Cash flow includes no consideration of inventory change, accounts payable or receivable, or depreciation. The absence of these important adjustments means that profitability decisions based on cash flow will be grossly misleading.
A cash flow projection can be developed in either of two ways. Information from last year can be used to estimate current year revenue and expenses. Adjustment of last year's information will be necessary, depending on price change and change in the farming operation. This approach is quick but may not provide a high degree of accuracy.
A more exacting approach is to carefully plan the coming year's farm operation and base the cash flow on those plans. Several steps will be required in this process.
First, the scope of crop and livestock enterprises should be determined and detailed revenue and cost data about those enterprises should be gathered and organized; that is, enterprise budgets should be prepared. In addition to number of acres or number of head of each enterprise, decide on the technology to be used and the inputs, including machinery operations, that will be needed based on that technology. This crop and livestock information can be used to determine annual cash flow.
Step two is to estimate monthly enterprise income and expenses. To arrive at monthly cash flow, it is necessary to estimate when variable inputs will be needed and when machinery operations will be performed. Cost of the inputs and machinery operations must be determined. It is also necessary to determine when products will be sold and the amount of revenue that will be produced. The result of this process is an estimated monthly flow of income and expenses for all crop and livestock enterprises.
Transactions related to capital investment must be planned. This will include purchases, trades, or sales of capital items. Thus, it is necessary to decide when tractors will be traded, when the funds for a new barn will be needed and their amount, when the old bull will be sold, and when a new pickup will be purchased. These transactions are included in cash flow, depending on when the transaction occurs and the amount of funds received or expended.
Nonfarm earnings should be included in the projected consolidated cash flow. Wages and salaries earned off the farm, interest income received from investments, and other nonfarm source income should be included in the month they are expected to be received.
Family living expenditures and taxes are included in the month they will occur. Times of extra expense, such as holidays or vacations, should be planned and included in the consolidated cash flow.
Debt repayment should be planned and included for the month in which surplus funds will be available to make payment. Planning this feature of cash flow requires a review of receipts and expenses by month to determine when surplus funds are available.
The cash flow summary from the previous year is helpful in "fine-tuning" the projected cash flow. If the farming operation in the coming year will be similar to the operation during the previous year, comparisons may help in making adjustments. Those adjustments should be based on expected price or cost differences, production differences due to weather variations, or other differences between the year being projected and the one just completed.