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Why create a business budget?

By Brian E. Ravencraft

Cash is king! For farmers, evaluating cash flow needs and budgeting are essential factors in the ongoing health of a business. Some of the key objectives of creating a cash flow plan are:

  • Cash flow must be positive, timely and available
  • Measure and monitor your plan on an ongoing basis
  • Use the plan to manage the business proactively and reduce business surprises
  • Prevent problems before they arise and develop strategies to prevent problems
  • Budgets are forward looking documents — they force you to think about the future
  • It’s the crystal ball. If you don’t like what you see, you have the opportunity to change
  • Significantly improves your chances to be successful .

Cash flow is an essential factor in the ongoing health of a business. Cash flow must be positive, timely, and available. The best way to ensure this, is to have a Cash Flow forecast. In order to stay in control, this plan needs to be measured and monitored on an ongoing basis so that you can manage the business proactively.

 

What is cash flow?

The definition of Cash Flow is fairly basic:

Cash that flows into the farming business from all sources such as cash sales, borrowings, sale of equipment less the cash that flows out of the farming business such as operating expenses, equipment purchases, loan repayments.

 

Key requirements of your cash low

Successful farming operations understand the importance of cash flow. The financial strength of a business depends on if cash flow is positive, available, and timely.

Positive: Net cash flow should be positive. Cash inflows must exceed cash outflows.

Available: A company must have sufficient cash flow in liquid assets so it can access the cash to pay its bills.

Timely: Cash inflows must be timed to come in before cash outflows are due.

Even though this sounds pretty basic, it doesn’t just happen by accident. Those farmers that do this successfully have cash flow forecasts, which they manage (at least) monthly so that they can plan for any cash shortage.

 

Measuring your performance

Cash Flow forecasts are useless unless the actual results are monitored regularly. Failing to fulfill, or exceeding your assumptions, can affect the long or short-term viability of your plan. Measure and understand the effects of variations to your plan. There is always the opportunity to do better. If you’re not monitoring your actual results regularly, you can’t capitalize on that opportunity. Finally, remember the farming environment is constantly changing and the same thing that works today won’t necessarily work tomorrow.

The key phrase you need to remember is: What you can measure, you can manage.

Budgeting and Cash Flows are essential factors in the ongoing health of a farming business. In order to stay in control, your plan needs to be measured and monitored on an ongoing basis so that you can manage the farm business proactively. The best way to ensure that cash flow remains positive, timely and available, is to have a Cash Flow/Budgeting plan.

Next time, I’ll take a look at different methods of improving cash flow.

Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com or at BRavencraft@HolbrookManter.com.

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