By Glennis McClure

This is the time of year to plan ahead. Estimating the projected costs of production for your farm and ranch enterprises helps in creating marketing plans, comparing potential profitability of different enterprises and evaluating alternative production practices and inputs for the upcoming year. Taking time to think through your plans and preparing enterprise budgets can guide in estimating overall farm or ranch net income and can assist in the preparation of an annual cash flow.

In order to survive in the long run, an operation must be profitable. It’s from profits that we can reinvest or pay down business debt, make a living and pay income taxes as necessary. And no one wants cash shortages, so maintaining a clear understanding of cash flow — when revenue comes in and when payments are due — is essential for effective management planning.

Keep your cash flow

Cash-flow budgeting helps in determining if your operation will generate enough cash income to meet all cash needs, estimate the amount of operating credit required, plan loan repayment timing, and effectively communicate your farming plans and credit requirements to your lender.

First, let’s consider what goes into projecting net farm income (profit or loss) for a given year. On the income side, this includes the value of all production (sold or unsold) and any additional revenue from services provided for the planning period. While prices may vary throughout the production year, an average price can be used if products are unsold.

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On the expense side, all costs related to production or services must be accounted for in net income calculations. This includes operating, ownership and overhead costs — both cash expenses and non-cash items such as depreciation, unpaid labor and the opportunity cost of investments.

A projected or proforma net income statement can be created if you’ve taken the time to prepare individual enterprise budgets for your operation. Simply adding together all projected revenue and expenses from those enterprise budget will give a good estimate of annual profitability.

While preparing budgets and calculating operating costs and input requirements, adding a timeline for each operation can help create a monthly cash-flow needs report. By factoring in carryover inventories, expected production yields and prices, you also can estimate the timing of cash revenue projections.

Another key difference between a cash-flow statement and a net income or profit/loss statement is that the cash-flow statement includes additional cash inflows, like loan proceeds and off-farm income, as well as other cash outflows, such as planned capital purchases, loan payments, family living expenses and income tax payments to be paid during the upcoming year.

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As simple as ABC

Preparing enterprise budgets and consolidating all revenue and expenses from these budgets can help estimate the farm's overall net income (profit or loss projection). Additionally, much of the same data can be used to create a cash-flow statement. Although this can be done with pencil and paper, using modern technology can make the planning process much easier.

The University of Nebraska-Lincoln's Agricultural Budget Calculator (ABC) program is a free resource that helps make this process feel seamless. In the whole-farm module of the program, a cash or economic report can be created, combining all enterprises created for a budget year. This report can serve as a proforma profit-and-loss statement if all revenue and expenses are entered for each enterprise. In addition, a cash-needs report is available based on when inputs are used in the production cycle. After adjusting the cash-needs report to when those inputs will be purchased or identifying if they are already in inventory, and then adjusting when cash is expected to be received and spent, a cash-flow statement can be created in ABC.

Using enterprise budgets to stay current with the cost of production and breakeven estimates provides useful information for making management decisions. The ABC program is designed to be a dynamic, user-friendly enterprise budgeting tool with reports and analysis features built in. Users can create custom crop budgets or download one or more premade Nebraska crop budgets into their own ABC enterprise budgeting account to modify. More information is available, along with a list of upcoming ABC program training sessions, at cap.unl.edu/abc. The ABC program’s direct link is agbudget.unl.edu.

McClure is a Nebraska Extension educator and farm and ranch management analyst.