Cash Flow Budget

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Cash Flow Budget

• What is it?
• It is a summary of the cash inflows and outflows
  over a given period of time.
• It is an important forward planning tool.
• Purpose
• Estimate future borrowing needs
• Estimates the loan repayment capacity
• Schedule payments and harvests

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Cash Flow Budget
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Characteristics

• Includes all cash income and cash expenses.
• Cash inflows would include sale of capital items
  and new loans.
• Cash outflows would include payment on loans and
  cost of new capital assets.
• Includes personal cash income and expenses
• Does not include any noncash income or noncash
  expenses.
• For example, it does not include inventory
  changes or depreciation
• Includes the timing of cash flows (monthly)

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Mechanic of the cash flow budget
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Cash Flow Coverage Ratio

• Liquidity indicator
• cash available cash required for interest and
  and principal payments of real estate and
  equipment loans
• Excludes payments on the operating loan balance
  because they are flexible
• Indicates the extent to which the excess cash
  generated by the business provides a cushion for
  or flexibility in covering these debt-servicing
  requirements
• ? cash flow coverage ratio ? liquidity

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Debt-Servicing ratio

• Liquidity indicator
• Cash required for interest and principal payments
  ? by total cash inflow
• ? ratio ? burden of debt on cash flow
• ? liquidity

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Cash Flow Risk Sensitivity Ratios

• excess available cash ? total cash available
• Percent farm revenue can decline and still meet
  cash flows
• ? ratio ? risk

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Cash Flow Risk Sensitivity Ratios

• excess available cash ? cash operating expenses
• Percent farm expenses can increase and still meet
  cash flows
• ? ratio ? risk

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Cash Flow Risk Sensitivity Ratios

• excess available cash ? total liabilities
• Percent interest rates can increase and still
  meet cash flows
• ? ratio ? risk

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Uses for a cash flow budget

• Prevent borrowing too much money too soon.
• Planning of purchases, harvests and debt payments
  to minimize borrowing.
• Does not measure profit

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Questions

• Why is machinery depreciation not included in a
  cash flow budget?
• Why cash inflows from nonfarm sources and
  outflows for family living expenses may be
  included on a farm cash flow budget?
• Does an estimated positive net cash flow at the
  end of the year indicate the farm is profitable?