Drawing up a budget is never an exciting task, but working on a cash-flow budget can be a valuable one.
The process can be a bit overwhelming, but it helps if you think in terms of a weather forecast, says Ron Van Nurden with
“Weather forecasts aren’t always accurate, and cash-flow budgets don’t always work out as planned,” he notes. “But cash-flow budgets can help you forecast what direction your business is headed.”
Like most business ventures, you have to start with accurate records, including those for crop production, livestock and accounting. “Include historical records as this will give you a long-term perspective of your business. It also will improve the accuracy of your cash-flow budget by indicating trends,” says Van Nurden.
Here are some additional tips for getting the cash-flow budget process underway.
Don’t forget the balance sheet. “Have accurate supply inventories like fuel and feed, along with accurate inventories of crops in storage, hogs on hand and other current assets,” says Van Nurden. “Also have accurate information about your accounts payable.”
To create an accurate starting point for the operating line, calculate and budget accrued interest. Then list all of your loan balances and loan repayment obligations. “Don’t forget personal debt, including credit cards,” he says.
Next, develop crop and livestock budgets in the most common measure. “For crops this means yields and cost per acre. For hogs, it means cost per litter and sows per pigs per year,” Van Nurden points out. Use five-year averages for yields and pork production. “But for most costs, use numbers from the past year,” he says. “If you use the five-year average you’ll undershoot the projection.”
To prepare a cash-flow budget, estimate your production units for the budget year. For example, this should include acres of crops planted and litters of hogs produced. Then forecast income and expenses, but know your tendencies for both scenarios. “Most producers will overestimate production and underestimate expenses. But you can handle this by using the five-year average,” says Van Nurden. “Also, producers tend to expect to get higher prices than are realistic. That’s why I recommend using USDA’s projected price range on commodities.”
Once you’ve projected crop sales,
CCCloans, capital changes (such as breeding stock purchases or equipment sales) and loan payments, you’re ready to evaluate cash flow. “Don’t just put the cash flow together and make it look good for the banker,” he adds. “Lenders expect you to follow your cash-flow budget as closely as you can.” The point, of course is that being realistic will not only benefit you and your business, it will reduce the stress of trying to reach what could be unattainable goals.
Finally, challenge yourself to beat your projected cash flow. This is akin to working to improve pigs per sow per year. You set a production goal, map out what you have in hand and what you need to get there. Then try to meet or exceed your target.
“The cash-flow budget is a tool that is important in terms of helping you project and plan for the future direction and needs of your business,” says Van Nurden.
A cash-flow budget can help you predict when storm clouds might be gathering on your horizon or when clear skies are ahead. Like tuning into the weather forecast—your cash-flow budget can’t necessarily change what tomorrow brings, but with you’ll be more informed and better prepared for what lies ahead.