Projecting Cash Flows on Dairy Farms

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Good financial management of farm businesses frequently requires projections of cash flows for future periods. To assess the advisability of making changes in the business, or the financing of those changes, an estimate of the cash flows after the change is usually necessary. A good lender will usually demand such projections. Progressive management of a business generally involves preparation of budgets to indicate the planned performance of the business for the next period (month, quarter or year), and then, comparison of those planned budget values to actual performance. The quality of the investment, financing or management decision depends upon the quality of the cash flow projections. Quality of cash flow projections varies widely. They can be easily manipulated for a predetermined outcome, if the person doing the cash flows is so inclined. This has led some lenders and farmers to discount projections. However, because a job can be done poorly does not mean that the farmer is better off not doing it at all. For many decisions, a good cash flow projection is the only way to assess a business change. Even if the lender will finance what ever a good farmer with a superior performance record wants to do, the farmer must collect information to the profitability and financial feasibility of proposed changes. There are many levels of effort that may be used in projecting cash flows, depending upon the magnitude of the changes being made in the business. If little or no change is being made, last year’s actual performance or last years performance adjusted for expected price changes may represent a good projection for next year. If only small changes are being made, last year’s performance can be modified in those areas that are expected to be altered as a result of the changes. However, if significant changes are being made, each individual cost and return item needs to be estimated. This publication is designed to assist in the process of projecting individual cost and return items. It is assumed that base year data on receipts and expenses for this farm are available. For most farms this would be the most recent year’s experience, unless that year was not typical of normal business performance. If a new farm is being projected, average receipt and expense data from summary data reported by a University, lender, accountant or other firm can be used as a base. In such a situation it must be recognized that actual performance may differ significantly from average. In developing base year data from average farm data, it is important to carefully consider each change and have a clear justification for each modification. The estimation procedures suggested in this publication may be most easily incorporated in projections when a spreadsheet is being used in estimating cash flows. In the following discussion individual cost and return items are discussed one at a time. These projection procedures are most applicable to dairy farms in northern climates.

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