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Cash flow planning

Timothy Dolan

Published in Dairy Star July 3, 2008

Cash flow planning has never been more important on a dairy. Prices are up, but so are input costs. Making a decision on what dollar figure to use for income and expenses is a big part of the challenge. There are sure to be times ahead in which prices will drop and also go up. How have costs changed as milk price increased? How will the input costs drop in a period of milk price reduction? Maybe that won't happen! Yeah, right!

It makes sense to plan now for whatever challenges lie ahead. “Making hay while the sun shines,” translated into economic terms means, “Put some money aside when times are good.” Putting a cash flow plan together (that includes a savings plan) adds an element of accountability. It allows one to refer back to the plan from time to time to “keep on track.” Out of curiosity, I did a search on the Internet on cash flow planning. There were 709,000 hits. So, I'm not the only one advocating the practice. Cash flow plans that I have seen range from very simple to extremely complex. Complex is good if the information is accurate and reflects market realities. Simple will work also, depending on the situation. A partial budget for example, reflects the changes in the operating budget if only one thing were to be changed (see example form). This is a “what if” situation that can help in deciding “do I” or “don't I” start the reproduction program or whatever single item is being considered.

How do we set up a partial budget? Start with a sheet of paper divided in quadrants. The four quadrants may be labeled: 1) What are things that increase income? 2) What are the increased costs associated with the change? 3) Where will costs be reduced? 4) Where will income be reduced? You then proceed as follows: Add up the positive impacts (increased income and reduced costs), add up the detracting impacts (increased costs and reduced income), then do the math. If the positive impacts outweigh the detractions, you now have a road map for that particular change, whatever that may be.

Figure 1. Partial budget form example
Proposed change:
Things that increase income Things that reduce income
Things that decrease costs Things that increase costs
Increase in net income (A) Decrease in net income (B)
Change in net income (A-B)

In order to measure any progress, one needs a balance sheet listing of all assets and liabilities of the operation to see where things at any particular time.

A more comprehensive plan would be a long-range budget. This looks at a complete plan with all enterprises and all associated costs along with all revenue generated from the farm. There are long-range average prices that I have used over the 35 plus years of using this tool; however, in the last year, they are somewhat of a deterrent for long-term budgeting. Using short-term prices for long-term planning requires some degree of temperament akin to prudence.

Cash flow planning is a challenge in changing times. At what prices can we find comfort? One needs to examine the idea of a marketing plan. If you have your inputs locked in, those prices are secure for your plan. Purchase of options has the ability to ensure a bottom line price but has an associated cost. What insurance package do you carry? Income protection is just a thought. Cash flow plans are only as accurate and secure as the information that gets plugged into it.

Another key factor with a cash flow plan is fiscal restraint and understanding the tool and its proper use. For a cash flow plan to work, one needs to follow the plan and understand each line item, and know your limits. If income starts to go down, spending must also be reduced. The use of a monitoring system or worksheet is as important as a necessary farm implement, or tool of the trade itself. There are many computer programs available to assist one in cash flow planning. There are also many professionals that can assist farm families in this endeavor. The Adult Farm Business Management System is an excellent model in this area. If your cash flow planning model is the equivalent of planting corn with a 2-row, 40-inch planter, it may be time to consider an upgrade.

One other financial tool can help analyze the year's finances in review. It can answer the question, how did things go? The tool I have used for many years is the FINPACK software system, which includes a balance sheet, enterprise budgets, FINLRB (long range budgeting), FINFLO (cash flow planning), and FINAN (financial analysis). These products are available through the Center for Farm Financial Management.

In summation, these tools help answer the questions "Where am I?", "Where am I going?" and "How do I get there financially?" They can be a great asset to any size dairy operation in these rapidly changing times.

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