Annual cash flow planning is worthwhile
Published in Dairy Star April 9, 2005
The idea of cash flow planning has been around for a long time. When I started my career in Extension over 30 years ago, working with farm families on cash flow planning was a paper and pencil job. It took a lot of pencils, a lot of paper and good erasers. Hand held calculators were in existence, but not everybody had one. I also had a slide rule (I still have it). It worked without batteries too!
Today, in doing cash flow planning, more often than not, I start out with the paper and pencil. However, we then quickly move to a tool that is very helpful and powerful in the mission of planning a cash flow – the FINPACK. FINPACK is a financial planning and analysis software package developed and supported by the Center for Farm Financial Management at the University of Minnesota.
I have used the FINPACK tool for as long as I can remember. With this tool we can formulate a balance sheet, budgets for crops and livestock, long range budgeting, cash flow planning, and financial analysis geared to the specific farm family.
For the purpose of this article let us focus on the balance sheet, budgets for crops and livestock, and then discuss the cash flow.
- The balance sheet takes into account all of the assets and liabilities. All assets are entered on the left and liabilities on the right. Both assets and liabilities are categorized into short term, intermediate term and long term. "Short term" assets are things that can be liquidated today and become cash within a very short time. Grain is one example of short term assets. The "intermediate term" assets are things that have a longer life and are more necessary for the business over time. Examples are machinery and breeding livestock. "Long term" assets are usually land and buildings.
- The liabilities side of a balance sheet include the loans and notes or money owed against the assets. When all assets and liabilities are entered on the balance sheet, the total of the liabilities are subtracted from the total of the assets to give the farm family's Net Worth (what is left over if all assets were liquidated and all notes, bills and loans paid). The reason the balance sheet is completed first in cash flow planning is to establish the basis of the operation. Everything ties into the cash flow plan electronically in order to account for bills, notes, etc., and make sure they are paid in the planning process.
- Crop and livestock budgets are the next step. In the FINPACK program these budgets are handled as a per unit method (one cow and her replacement is a unit and one acre is a unit). Budgets help determine the returns and costs per cow and its replacement and returns and costs per acre of any given crop.
- The cash flow itself. In this section the computer program helps get a handle on cow numbers in production and cows on hand per month as well as crop type and acres planted. The program also helps analyze related operating expenses, such as fuel, repairs, custom hire labor, land rent, insurance, utilities, maintenance expenses and accounts payable. These expense areas vary widely on farms so it's important to know the situation for each particular farm operation. These expenses are also areas that need to be kept in check to ensure profitability. Other items that need to be included are government payments, custom work income and other sorts of farm income.
Family living expenses must also be a part of cash flow planning. This can be an area that draws a lot of attention. The family needs to calculate out all costs associated with maintaining their home life. These costs include, but are not limited to, the following: food and meals expenses, medical care and insurance, donations (church and other), household supplies, clothing, personal/child/dependent care, alimony and/or child support, gifts, education (as a parent this cost never ceases to amaze me), recreation (all work and no play??), utilities (the house share of electric, phone), non-farm vehicle operation and maintenance expenses (maybe it's time to get rid of that sports utility “tank”), the household share of real estate tax, any dwelling rent, household repair, life insurance, and other expenses associated with family living. In my work over the years I have seen a wide variety of per person costs associated with family living, but it averages in the range of $10,000–12,000 per person.
Without question, good cash flow planning involves time and it involves effort. But, it is well worthwhile. Managing by just using the checkbook balance and/or keeping receipts in a shoe box can be a real challenge in understanding the financial situation at all times. By using cash flow planning, the farm family is able to make better business decisions and make management adjustments as needed throughout the year. Once a farm family has completed their plan, they will be very thankful for having a well planned cash flow to follow. Therefore, if you plan to stay in business, do an annual cash flow plan.