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Why You Need a Cashflow Budget

A cattle feeder was certain of his cost of production, yet he wasn’t profitable. He and his financial officer worked through a cashflow budget using historical and projected numbers. The cattleman learned he was underestimating his cost of production by $73,000 and consistently marketed below his true breakeven by 30 cents per pound.

“Until you have a cashflow budget, you can’t accurately calculate your production costs and breakeven,” said Tyler Peters, one of our business development officers. “It is estimated that only 10% to 15% of producers have a cashflow budget. They have the competitive advantage.”

“It is estimated that only 10% to 15% of producers have a cashflow budget. They have the competitive advantage.”
– Tyler Peters, business development officer

What a Cashflow Budget Does for an Operation

  • Projects profits and losses
  • Provides insights into areas impacting profitability
  • Helps reduce some of the emotion associated with market fluctuations What a cashflow budget can’t do for an operation
  • Replace an annual balance sheet
  • Eliminate the need for cost of production or break-even calculations
  • Guarantee profitability
  • Make financial decisions easy

How to Get Started

Gather both historical and forward-looking numbers to get the truest picture of your operation. Below are examples of documents in each category.

  • Historical income and expenses: tax returns, income statements and bookkeeping records. It’s also important to review your family living expenses.
  • Forward-looking income: projected revenue from farm commodity and livestock sales, other farm income, all nonfarm income.
  • Forward-looking expenses: projected or estimated inputs, overhead expenses, rent and payments.

Complete a Plan

Producers can pick from a variety of cashflow templates. Talk to your FCSAmerica financial officer if you want to use our template. Whatever the form, keep it simple to start.

  • Map out your acres and what you plan to do on those acres. If you have a diversified operation or livestock, project income and expenses for each enterprise individually.
  • Write down all anticipated production costs.
  • Project total production. Use APH on existing production, approximations on new acres and reasonable price estimations. When in doubt, be conservative with your numbers. Points to remember:
  • Be realistic on variable expenses
  • Keep crop years separate
  • Know all your debt payments
  • Track the small stuff. It adds up, as one young couple learned when they began digging into the cost of frequent children’s museum trips, drive-up food orders, $5 credit card swipes, etc. The $24,000 they estimated for annual family living expenses grew to $48,000 when they accounted for all the “small” stuff, said Peters, who worked with the couple.

Annual vs. Monthly Cashflow Budget

An annualized projection compares income and the value of commodities produced in a given year against the cost of producing that income. Your resulting cost of production enables you to create a marketing plan and determine the viability of your operation in the current environment.

A monthly cashflow plan allows you to understand and better manage the inflow and outflow of cash (or operating loan) to ensure your operation runs smoothly. It also allows for adjustments. An unexpected transmission repair bill of $35,000, for example, might require you to trim planned expenses elsewhere to keep the operation on track for the year.

 

Example of Good Cashflow but Low Profitability:

  • Living off inventories or depreciation, and no reinvesting in the operation.
  • Borrowing money
  • Not paying bills

Example of Bad Cashflow but Good Profitability:

  • Expanding business with increasing assets but low cash sales
  • High withdrawals for family living
  • Paying down debt rapidly

 

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FCSAmerica serves farmers, ranchers, agribusinesses and rural residents in Iowa, Nebraska, South Dakota and Wyoming. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.