The Importance of Farm Cash Flow Budgeting
Effective farm cash flow management is foundational to the financial security of your operation.
In a climate of economic uncertainty defined by legislative reform, rising production costs, and fluctuating commodity prices, having a good grasp of your farm’s cash flow is crucial.
To provide more insight into how to forecast farm cash flow and what to do with these projections, Senior Director of Partner Relations Curt Covington—an expert with over 40 years of experience in helping farmers manage their finances—has provided actionable takeaways to help you build a successful farm cash flow forecast. Curt’s step by step advice will help you set up the framework for sufficient cash flow.
Here’s what he had to say.
A Breakdown of Farm Cash Flow Budgeting
A farm cash flow measures all cash activities on the farm, regardless of the source or use of that cash. Next, it’s important to understand and prioritize the components included in a cash flow budget.
Essentially, this framework captures all sources and uses of cash in any given year. The goal is to never run short of cash to pay your bills during the growing season. To prevent this from occurring, there are two keys:
1) The budget should be prepared on a month-by-month basis.
2) The farm needs to have access to operating financing to cover any monthly shortfall in its ending cash position.
To help you manage your cash flow, learn about the benefits of forward contracting and prebuying inputs.
Developing a Cash Flow Projection for Your Farm
In a volatile industry like farming, it’s very challenging to accurately forecast annual cash flow activities. It’s important to remember that a cash flow budget is a “best effort” estimate of all cash activities for any given month. It’s best to prepare the budget around a “most likely” case followed by a “shocked” case where cash inflows are reduced, and cash outflows are increased by a reasonable percentage (example: 10 percent). Leaving room for changes in commodity prices, input costs, interest rates, and more will provide a roadmap to success even when the unexpected happens.
What Makes a Strong Farm Cash Flow Forecast?
A farm cash flow forecast should reflect achievability. This means that your estimates for revenue and expenses should be grounded in the reality of current market conditions.
Pro tip: If you can’t, or choose not to, forward contract, there are many expert resources that can help guide the farm in determining a reasonable price estimate for the coming year. The experts generally have a very good read on commodity price forecasts based on the current supply and demand environment. Some resources for predicting commodity prices include the USDA and commodity-specific trade organizations, such as the National Corn Growers Association, the American Soybean Association, Chicago Mercantile Exchange, and University of Illinois Doc Daily.
Another critical component of developing a farm cash flow forecast is to remember that it is a roadmap that will guide your operation for the next year. The forecast should be seen as a tool that guides most every financial decision. For example, you should consider:
- Does my cash flow forecast provide room to make emergency repairs?
- Do I have sufficient cash to pay my debts on time and as agreed?
- Do I need to adjust my living expenses to account for higher input costs?
Resources for Developing a Farm Cash Flow Forecast
Although the thought of developing a cash flow forecast can be intimidating, there are many resources out there to assist. Resources to create a farm cash flow forecast include:
- USDA cash flow projection worksheet
- Purdue University guide
- Iowa State University examples and guide
The Importance of Creating a Farm Cash Flow Budget and Forecast
Forecasting should never be viewed as a “one and done” exercise. A cash flow forecast is as important a tool in running the farm as a tractor is. It’s important to compare your monthly budgeted expenses to your actual expenses. Doing so helps the farm manage its bottom line in real-time and make immediate decisions if adjustments to spending are necessary and where they can be made.
It goes without saying, when you apply for an ag loan, lenders often request this information to better understand your operational finances. Maintaining an up-to-date cash flow budget will help save you time and stress during the loan application process.
Manage Your Operational Health with AgAmerica
Your financial health is a journey. When you work with AgAmerica, we are on that journey with you. Not only do we provide flexible financing, including interest-only payment options, but we also provide financial counsel to guide you in the right direction.
