Planning For A Successful 2017

 

Happy 2017! I love New Year’s. It’s the start of something brand new. The year is full of promise and opportunities. It is a fresh start.

 

As a general rule, I recommend that farms look at their financial records around January 1st. This helps to provide a consistent point in time for comparison. Farming is seasonal and a farmer’s finances are no different. Your checkbook after planting (June) might look very different than your checkbook after you sell harvested grain (December). By comparing the same points in time, you get a clearer picture of how you’re doing financially.

 

Additionally, it is wise to think about what your finances might look like in the year ahead. This is called “cash flow planning”. Simply put, it’s creating a budget for the year. You’ll look at your cash from operations, investing, and financing activities.

 

To do this, you’ll want to have monthly records of your income and expenses. If you use an accounting software, you can print off these records. Your banker or farm business management instructor can also help. Remember, your records are as good as what you put into them. If you haven’t done a good job keeping financial records, it will be difficult for you to identify how much you should budget. Good records are important for all types and sizes of businesses.

 

Begin by looking at cash from operating and start with your cash inflows. (Table 1) What is your checkbook balance? That goes in the first line. Add in any sales, payments, dividends, or other income you received. Sum up the total of all lines. This is your total cash inflow.

 

 

 

Next you want to determine your cash outflows (Table 2). What expenses do you expect that you’ll have? If you’re not sure, try looking back at your records. As an example, if you are trying to figure out your January 2017 expenses, look at your January 2016 expenses. Use those as a benchmark. Remember, this is budgeting and the numbers are not written in stone. Give your best estimate. You’ll also want to identify the minimum balance you want to have in your checkbook. I used $5,000. Add up all of these numbers to calculate your outflow.

 

 

 

Now you want to subtract your outflow from your inflow. In this case $257,000-$91,100= $165,900. It’s a positive number, which means there was money left over after covering expenses. A negative number tells us there wasn’t enough to cover all the expenses. 

 

Next, you move to cash from investing and financing activities next. (Table 3) This includes your capital sales, capital purchases, new term credit, and our term debt payments. This farm is not planning any capital sales, but is planning to purchase a farm truck later in the year. Fill in your loan payments and sum them up. Here’s the tricky part, find your operating surplus deficit, add capital sales and new credit to it, and subtract your loan payments and capital purchases. This will give you your total surplus/deficit. 

 

 

 

Finally, refer to your operating loan. (Table 4) Find your operating loan balance. That goes in the second line. If you had a deficit, you borrow against your operating loan (line 3). If you had a surplus, you pay down the balance and interest (lines 4 and 5). Calculate your ending balance based on what you paid or borrowed and fill in. (line 6) Finally, determine your new cash balance. If you have an operating surplus, subtract off the principal payment and interest payment from the surplus, and add in your minimum checkbook balance (here it’s $5,000). If you have a deficit, add the operating loan borrowing and minimum cash balance to the deficit. 

 

 

You’ll need to do this for each month of the year. Your ending cash balance from January becomes your beginning cash balance in February, your February ending cash balance becomes your beginning cash balance in March, etc. A template for this can be found at: https://www.extension.iastate.edu/agdm/decisionaidswd.html. (Look for cash flow budget) 

 

By doing this planning, you can get a picture for how your year will shape up financially. This can help you determine how much you need to borrow for your operating loan. It will also help you understand if you will be able to pay your bills. I try to be honest about these exercises. This one will take some time. Enlist the help of a trusted financial advisor if you need to. The important part of this is the finalized budget. With this you will be able to determine what you can afford for land rent, if you can purchase new equipment, and get an idea of the financial health of your business.