Cash flow planning. These are three words that typically inspire a response along the lines of “ugh,” “why?” or “never done it, never will.”
If anything was ever going to happen to change that response, it would be the $1.50 drop in the Class III price from February to March, or more likely, the need to renew a spring operating line of credit.
The word throughout the industry is that credit is tightening, which means that lenders will need to see more information than usual before making lending decisions for individual farm businesses.
Projections
One of those pieces of information may be cash flow projections. So, for those new to the process, how do you start?
The simplest thing to do is to take copies of last year’s annual and monthly cash flow statements and adjust them for what you expect to happen differently this year.
If you are using a computer system such as Quicken or QuickBooks, there is a section that will do this for you automatically. You can easily change total annual income and expenditures and how they are charged across a year.
In other farm accounting systems, you should also be able to run reports to give you similar information. If it isn’t readily apparent how to do this, contact their support center.
There are systems already in place on your farm that can assist with cash flow planning.
Tools
One tool is the herd summary sheet from your DHI records which shows: 1) cows expected to calve over the coming year by month 2) cows that calved during the previous year by month 3) when and why cows left the herd over the previous 13 months 4) how production increased or decreased on a monthly basis over the previous year.
This information along with your heifer calving schedule provides information needed to project pretty accurately the milk, calf, cull and breeding animal sales for the coming year.
In addition to quantities of milk and animals sold, you will need to estimate prices received. USDA is currently forecasting the 2010 Class III price between $14.20 and $14.80/cwt.
Grade A producers will also receive the producer price differential which averaged $0.65/cwt for the last five years as well as any quality and over order premiums or deductions from their processor.
An individual farm’s pay price will also be adjusted by its relative component production. If your operation is not changing significantly from previous years, your historical information will give you a solid foundation on which to make projections. Pencil in any changes you anticipate in quantities purchased, timing of purchases, prices, etc.
Cash flow projections help identify potential cash shortfalls and give you the opportunity to plan how to deal with them. Is a line of credit needed? Can some purchases be delayed or eliminated? Should some sales be made earlier?
Regularly checking actual performance against projections will become a routine task just like balancing the checkbook. An additional bonus is that cash flow planning leads nicely into income tax planning at the end of the year.
Final thoughts
A couple final thoughts on cash flow planning for 2010:
Be conservative yet realistic. Cows do not normally increase milk production by 25 percent because it makes the cash flow projections look good.
Anticipate production increases or decreases if there is a good management reason to do so, otherwise, rely on historical performance to set realistic production levels.
Just do it. If you have never attempted cash flow planning before, don’t get bogged down in the “what ifs” or “how can I possibly knows?”
Thousands of businesses utilize cash flow planning as an indispensable tool to project and monitor their business’s performance. Projections can and will change as we learn more each day about the factors affecting our farms tomorrow.
The farm that has a handle on what those changes mean to their bottom line will be the farm that is around the next time we see record high Class IIIs.
