Cash Flow will be Critical in the Next Years
Farm Business Management Update, December 1999
By Gordon Groover
The Basic Formula Price (BFP) for milk fell $4.77 in October, grain prices are close to historical lows, drought and floods have reduced yields, government programs are being phased out. The list goes on. Managing the flow of cash for the business and family under typical conditions is important to the success business; however, in the next few years it will be imperative.
Control of the farm business requires managers to have knowledge of sources and uses of cash for the business and family. The cash flow statement is the single most important tool a manager can use to monitor the financial performance of the farm business during the year. Net worth and income statements are summaries of the financial performance of the business and give historical indications of the financial health of the business. Profitable farms with strong net worth may still have problems generating funds to cover demands for cash during the year, that is the flow of cash for most farm businesses is lumpy. Therefore, mangers must plan to have cash available to meet the short falls during planting season and when livestock and/or feed are purchased. Meeting cash shortfalls requires the use of internal cash (savings) and/or using a line-of-credit from a lender.
Farm business managers should develop a projected cash flow statement using the previous year's records as a starting point to reflect what could occur in the upcoming year. Previous records are then adjusted to reflect anticipated changes in the need for cash, for example, increasing the acreage planted to a crop and/or starting a new enterprise. Projected cash flows should be developed at least on a quarterly basis, and if you are starting 2000 with cash shortfalls, it is advisable to project monthly. Monthly cash flows are a must following a year of unprecedented problems experienced by many farmers in 1999.
Hand calculating a cash flow statement can be time-consuming and mind-numbing work. However, computer tools can assist you in this task. Farmers using computer software for record keeping have a major advantage: the historical data is available to be manipulated into a projected cash flow statement. Quicken©, QuickBooks©, and most agriculturally-based software offer a feature to develop monthly projected cash flows from last year's data. This data can be adjusted to reflect changes in prices of inputs and outputs and/or changes in the enterprise mix. The real benefit to these software packages is the ability to compare actual monthly cash flow to projected cash flow as transactions are recorded. Comparing projected to actual cash flows provides a monthly check on the financial health of the farm business and can help in spotting problems in their early stages.
Farm business managers have additional choices, other than their record keeping software for projecting cash flow.
Cash flow planning and using it to track the financial performance of the farm business is critical regardless of the method used. Developing a cash flow plan should be a goal for the New Year.
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