Cash Flow Budgeting Flashcards
Is profit and cash flow the same thing?
Profit and cash flow are not the same thing!!!–Can have accounting profit but insufficient cash to meet day to day obligation
What does cash flow determine?
Cash flow determines the feasibility of a plan
If using borrowings to finance the planned investment:
Liquidity
What does cash flow budget present (2) things:
–Projects cash inflows and cash outflows over a period of time
–Looks at the timing of projected revenues and expense
What’s common with most farm enterprises?
Seasonal cash flow is common with most farm enterprise but bills and loan obligations must be met on an on-going basis
What are common cash flow problems?
-Physical management (inefficiencies in enterprise management
-Mis-match between the timing of cash receipts versus cash outgoings
-In a farm expansion/investment situation significant costs occur upfront but revenues flow later
(May result in liquidity (cash flow) problems where farmer struggles to pay creditor)
–Unplanned expenditure (e.g. impulse purchase of machinery)
–Personal drawings (family living expenses) may exceed the cash income generated by the business resulting in liquidity problems and declining net worth
– Inadequate monitoring and control–Family settlement issues (farm transfer, marital breakdown)
–Tax liabilities
– sometimes unexpected! (income tax, capital taxes)
What can help identify cash flow budgeting?
Routine preparation and monitoring of cash flow budget can help identify, manage and reduce potential liquidity problem
What is cash flow budget critical tool in?
Farm financial control
What is the cash flow budget a summary of?
Projected cash inflows and outflows for the business over a given period of time
1- How is the accounting period broken down into?
2-The CF budget comprises forecasted when?
3-How long is the CF usually forecasted for?
4-Do you include all transactions?
5- What does it indicate each month?
1–Accounting period broken down into months (or quarters)
2–The CF budget comprises forecasted monthly (or quarterly) cash receipts and expenditures
3–Usually forecast for at least the next 12 month period ahead
4–Includes all transactions that affect the cash/bank balance e.g.
*Operating receipts and expenses
*Fixed asset sales and expenditure
*Taxes
*Cash drawings
*New borrowings (term loans, etc.)
*Debt repayments (capital + interest)
5–Indicates expected cash surplus or deficit each month (or quarter)
What are the key steps for a cash flow budget? (11) MCQ
1.Outline your projected production plans for year (e.g. milk, livestock, crops)
2.Take an inventory of all livestock and crops on hand at start of year
3.Estimate livestock feed requirement
4.Estimate you milk, livestock and crop sales receipts for the year
5.Estimate your income from other sources for the year
6.Estimate your farm production expense
7.Allow for any stock purchases or on-farm investments to be made during the year
8.Other cash expenses
9.Include all loan repayments to be made during the year
10.Calculate the monthly (and annual) cash surplus or deficit (net cash position)
11.Review and revise the budget as necessary to ensure that the cash flow is adequate at all times during the year
Cash Flow Budgeting can be aided by computer software
What are the Computer software available (3)
*Spreadsheet software (e.g. Microsoft excel)
*Accounting software (specialist farm packages e.g. Kingswood, AgriNetetc. and general
e.g. Sage, Tas Books, Quickbooks etc.)
–Users can prepare budget
–Record all transactions
–Software reports actual v’s budget, variance analysis etc.
*Teagasc Cost Control Planner
–Microsoft excel based program developed by advisory staff
–User-friendly interface to guide user through steps in CF budget preparation
–Users record actual transactions each month
–Reporting of actual v’s budget, graphs, et
What are the uses of a Cash Flow Budget: (12) MCQ
Provides comprehensive picture of business and household financial situation
Helps in planning
Allows farmer to estimate overdraft/financing requirements during the year
Cash Flow budget may identify cash surpluses that could earn interest on term deposit
The CF budget can help prevent excessive borrowing
CF budget should support/complement a whole farm budget when evaluating a plan
It is a critical instrument in financial monitoring and control
CF budgeting = one of if not the most important budgeting exercise on any farm
Encourages financial discipline –if establish budget and monitor actual performance in relation to the budget
Preparation requires considerable effort especially if major changes in farm plan –but worth it!
Monitored CF budget allows for early identification of emerging problem(s) –provides opportunity to take decisive action before problem(s) gets out of hand
Use of spreadsheet of accounting software can simplify the task of preparing the cash flow budget and may permit sensitivity analysis to be performed
