MANG CH. 13

Estimating Quarterly and Annual Operating Loan Requirements (7)

1. Beginning Cash Balance 2. Estimated Net Cash Flow 3. Operating Loan Borrowing 4. Operating Loan Payment 5. Ending Cash Balance 6. Beginning Operating Loan Balance 7. Ending Operating Loan Balance

Constructing a Cash Flow Budget (5) (understand but won't be short answer, don't memorize!)

1. Develop a whole-farm plan 2. Take inventory 3. Estimate crop production and livestock feed requirements 4. Estimate cash receipts from livestock 5. Estimate cash crop sales 6. Estimate other cash income 7. Estimate cash farm operating expenses 8. Estimate personal and nonfarm cash expenses 9. Estimate purchases and sales of capital assets 10. Find and record the scheduled principal and interest payments on existing debts

3 uses for cash flow budgeting

1. Develop borrowing and debt repayment plan 2. Suggest ways to rearrange purchases to minimize borrowing Example: Move insurance premiums to months of large inflows 3. Help spot imbalance between short, intermediate, and long term credit

4 general uses of cash

1. Farm operating expenses 2. Capital purchases 3. Non-business expenses 4. Principal payments on debt along with any interest due that is not included as an operating expense ONLY CASH EXPENSES

7 uses for cash flow budgeting (know and be able to talk about why they are important)

1. Plan borrowing and debt repayment 2. Suggest ways to minimize borrowing 3. Combine business and personal financial affairs into one complete plan 4. Help establish realistic line of credit 5. Plan purchases to obtain discounts 6. Aid tax planning 7. Find imbalances between current and noncurrent debt

1. Beginning cash balance or cash on hand at the beginning of the period 2. Farm product sales or other cash revenue from operation 3. Capital sales 4. Non-business cash receipts 5. New borrowed capital or loans received are???

5 potential sources of cash

_____ should not be used to project net farm income, i.e., farm profit

Cash flow budget

______ is a summary of the projected cash inflows and outflows for a business over a period of time.

Cash flow budget

Cash flow of irrigation system (cont'd)

Is the irrigation system financially feasible? Is it a good investment? i.e., profitable? (Is the irrigation system economically profitable?) Analyze purchase of system with cash flow analysis Are other parts of the farm business generating excess cash to meet the negative cash flows of the irrigation system Could other parts of the farm "subsidize" the irrigation system in years 1 to 3? Impacts of investment on income tax ignored here

Estimating Quarterly and Annual Operating Loan Requirements

Key Assumptions in our example Principal payments only (no interest) IF we have an existing loan balance AND we have positive net cash flow above our minimum cash requirement THEN we make the maximum payment towards the loan balance in an amount leaving our minimum balance

LOOK AT CHARTS IN NOTES

LOOK AT CHARTS IN NOTES

Cash flow budget and income statement are

NOT THE SAME!

_______include principal payments on debt and full cost of new capital assets but NOT depreciation

Outflows

It is possible to record and organize actual cash flows for some past time period into a _____

Statement of Cash Flows.

_____ can be compared against the budgeted values. Also, this statement can provide insight into the financial structure of the business.

The actual values

3 things cash flow budget:

a. Includes "when" cash received and paid b. "for what" and "how much" c. Typically done on a monthly basis for farm businesses

statement =

actual

Cash flow budget contains ______

all cash inflows not just revenue and expenses

Will a new investment generate enough cash income to meet its additional cash requirements? In other words, is the investment financially feasible?

answer this with more than just "cashflow"

financially feasible means:

can we cover out butts, not always yes

Purchase of capital asset (land, machinery, buildings) affects ____ especially if money is borrowed.

cash flow

_____ ignores some items which are costs and revenues depreciation, opportunity costs inventory changes

cash flow

_____ includes some items which are not revenue and expenses new loans received and receipts from capital sales principal payments on debt and cost of purchased capital assets

cash flow

ONLY CASH =

cash flow budget

_____ can be used for monitoring and control. The budgeted amounts can be compared to what actually transpires.

cash flow budget

_____ Estimate amount and timing of future borrowing needs and ability to repay loans

cash flow budgeting

what addresses the following questions???? Is the plan financially feasible? Not the same as, "Is the plan economically profitable?" Will there be sufficient capital available when needed? If not, how much money must be borrowed? Will I be able to repay new loans?

cash flow budgeting

A cash flow budget contains estimates of _____

cash flows for a future time period.

an investment can be _____ but not finically feasible and vice-versa

economically profitable

budget =

estimate

the primary purpose of a cash flow budget is _____

estimate the amount and timing of future borrowing needs and the ability of the business to repay loans.

is the investment _____?

financially feasible?

_____ include sale of capital items and proceeds from new loans but NOT inventory changes

inflow

The time period is usually a future accounting period and _____

is divided into quarters or months.

look at calculating interest due chart

look at calculating interest due chart

borrowed capital require ____ and ____ payments. ex.) new cash outflows

principal and interest

cash flow =

timing

Cash flow budget is concerned with the______

timing of revenue and expenses

major question before purchase?

will asset generate sufficient flow to meet these additional cash requirements