Cash flow projections help prepare your farm for what comes next

Regular and abundant rain keeps water flowing whether we want it or not. Global events transpiring over the last 30 days raise serious questions about whether cash will keep flowing as abundantly.

Milk prices that looked better than they had for the past five years have taken a serious dive, driven by massive uncertainty about what seems like everything. I am certain that over time we will again be out and about, and dairy demand will increase. In the meantime, how do we manage the uncertain cash flow?

Go with facts

The best suggestion I have right now is to arm yourself with facts. If you have already prepared a 2020 cash flow projection, you are already in the game.

If it is an annual projection, break it down by month or quarter. How did the January through March actuals compare to the projections? Review input and product prices for the next quarter. How does the plan need to be changed?

Cash flow projection

What is a cash flow projection? A cash flow projection identifies and quantifies where all cash will come from and where it will go over a set period of time, usually a year. Subdividing that projection by quarter or month is even better, also showing the amount and timing of dollars coming in and going out.

Cash flow goes beyond the income and expenses included on the income statement. It also includes income from sales of assets (capital sales), term loan borrowings and any non-farm sources. Additional cash outflows include principal payments, purchases of capital assets, family living and income taxes.

When there is a projected shortfall of cash, where will more cash come from? Cash flow projections show when a line of credit or other source of cash will be needed, and when the farm should be able to pay it back.

The long term goals are to zero out the line of credit each year, and to increase the farm’s cash balance over time.

First time

If you have not done cash flow projections, carve out some time and get one done — no, not always easy to do, but you will arm yourself with some working facts.

Some get-started suggestions include the following:

• You have the history. The easiest way to project what will happen is to look at what did happen. This is assuming that you have not made major business changes in the past year. Ask your bookkeeping program to generate a monthly cash flow report for 2019. Use that as the foundation for your 2020 projection.
• Generate a monthly cash flow report for January through March of 2020. Your first quarter is in the bag.
• Look at your historic cash flow from April through December 2019. As you plan for those months in 2020, how will they be different? Is milk and/or component production higher or lower? Use your projected milk prices. Adjust income accordingly.
• Be realistic! Review expenses, timing and consider if any bills went unpaid or if some of the expenses included catching up on some overdue accounts. Are all accounts caught up now? If so, what are the expected “normal” expenses as you look ahead?
• If you keep records by hand, possibly using the Ohio Farm Account Book, you can follow the same process and do projections using last year’s information.

Cash flow projection tools

Kansas State University has both a hard copy cash flow projection template and two Excel spreadsheet templates that are useful for starting and completing cash flow projections. They can be downloaded at www.agmanager.info.

Change will happen

A cash flow projection is just that, a projection. It is a planning tool and a controlling tool. What should our farm business look like? If projections were nowhere near actuals, why? What needs to be changed in the projections for the months to come?

Capture everything; be as accurate as possible; be conservative — exactly the way we approach developing balance sheets. Make some time, arm yourself with facts and the best estimates. Compare, adjust and move your farm business forward.