Why is a Cash Flow Plan Important?
Article By: Brad Sirianni, SFB relationship manager
At the end of each year, farmers need to evaluate and benchmark their operations to ensure they are running efficiently. After identifying strengths and weaknesses, summarizing and benchmarking the cost of production, and identifying production opportunities, producers are ready to prepare a cash flow plan that reflects the business climate that is expected in the year ahead.
The cash flow plan provides a guide for both the manager, farm team members, and advisors to understand what it takes for the farm to achieve profitable income levels and to accumulate sufficient cash flow. But developing the cash flow plan is only the first step, and since business conditions constantly change, producers must review the plan against actual performance regularly in order to make the adjustments needed to achieve or improve on planned outcomes. The process is repeated each year as the business cycle begins.
Many do their planning once the new year has begun, however, it is highly recommended that you do your planning during the last quarter of the present year. This will help with marketing, early pricing/purchasing opportunities, and tax planning, and will lead to productive conversations with your team and financial advisors.
Steps to Cash Flow Budgeting/Planning
A cash flow plan or budget is an estimate of all generated revenue and all cash expenses that are expected for a certain time period. Estimates can be made monthly (my recommendation), bimonthly, quarterly, or just annually. Cash flow planning/budgeting looks at money movement and can only predict net income or profitability.
A cash flow plan/budget is a useful management tool because it:
- forces you to think through your farming plans for the year.tests your farming plans (options, scenarios).
- projects how much operating credit you will need and when.
- projects when loans can be repaid.provides a guide against which you can compare your actual cash flows.
- helps you communicate your farming plans and credit needs to your lender.
Review your cash flow budget from time to time during the year. Prices and costs may differ from your estimates, or production plans may change. Your best source of up-to-date financial information will come from your records. Many programs will allow you to produce year-to-date statements of cash flow information against which your budget can be compared. This will help you anticipate changes in your needs during the year. You may even need to prepare a revised budget for the remainder of the year.
Developing a cash flow budget for the first time will not be easy. Close communication with your team and bank lender is important. By planning where you are going financially, you can increase your chances of arriving there safely.
Sources and additional information can be found here: Penn State Extension and Iowa State University.
Brad Sirianni is an ag relationship manager at Security Financial Bank. He has a vast knowledge of farm analysis. He worked as a farm business production management instructor for a combined 16 years before joining SFB. Contact Brad at 715-670-0729 or bsirianni@sfbank.com.
