University of Maryland Extension

Usefulness of cash flow

Author: 
Dale M. Johnson, Extension Specialist, Farm Management

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The cash flow is one of the most useful tools a farm manager has for managing the business. The reason that a cash flow budget is useful is because it forces you to think through all production and marketing aspects of your business. As mentioned before, many businesses fail, not because the idea is bad or because long term profit is insufficient, but because of short term cash flow problems. In developing cash flow, you have to estimate the quantity of products you will sell and the prices that you will receive. You have to estimate when the products will be sold. To produce these estimates you will need to develop a marketing plan. You have to understand the production process completely in order to project costs. You have to understand the time-line for production. You have to know how much land, labor, machinery, and raw materials you will need and when you will need them. You have to know the prices for all of these inputs. You will also have to estimate storage and transportation costs to get your products to the market. You will have to estimate the timing of all inflows and outflows through the year. This tool helps you to understand the short term cash flow problems that often accompany new activities.

The cash flow will help you understand if you need to borrow money, how much money you will need to borrow, and when you can pay the loan back. A cash flow budget is a useful tool for explaining the financial implications of your enterprises to a lender from which you are applying for a loan. Most bankers or lenders will require a cash flow budget as part of a business plan.

Sometimes you may employ a financial advisor to help you complete the cash flow budget. The main purpose of a financial advisor is to help you lay out the cash flow budget and to help you think through the business. But it is important that you understand all of the numbers in the cash flow budget and how they were calculated because you are ultimately responsible for the success or failure of the business. If the business fails, it is likely because you did not do a realistic cash flow budget.

Computer spreadsheets such as Microsoft Excel are used to make the cash flow calculations easier to do. There are generic spreadsheet templates that can be adapted to your business. Blank income statement and cash flow forms can be downloaded from the Example farm cash flow section

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