Cash Flow Budgeting A Weather Forecast for Your Business



Cash flow budgets should be thought of in the same way we think about weather forecasts. Many producers complain that cash flow budgets aren’t accurate and many times miss the mark by the end of the accounting year. Don’t we say the same things about weather forecasts? Producers say it is hard to forecast price, production, input costs and other items needed as they develop the cash flow budget. The budgets are hardly ever 100% accurate. Weather forecasts are similar. Despite the fact the weather forecast isn’t accurate; we still look to the forecast every day. It still gives us a better look at the weather around us than if we had no forecast at all. Cash Flow Budget can be looked at in much the same way. While they are not going to be 100% accurate, cash flow budgets give us a very good idea of what the business’s future will hold based on the facts and information we have about how the business performed in the past. Most successful producers depend on cash flow budgets like they depend on the weather forecast, even though neither are 100% accurate.



  1. Help pork producers understand the importance of cash flow budgets to the management of their business.
  2. Develop a list of the information needed to do an accurate cash flow budget.
  3. Give pork producers a step by step process for developing a cash flow budget.
  4. Suggest evaluation concepts as producers seek to understand the consequences of a completed cash flow.


What information is needed to do an accurate cash flow?

Good, Accurate Records

  • Livestock production records (Born per litter, weaned per litter, feed per lb of gain, death loss etc.)
  • Crop production records (If crop production is part of your business)
  • Accounting records (Records should have enough detail to be able to assign income and expenses to enterprises in the farming operation)
  • Balance sheet which would include:
    • Accurate inventories of supplies (Fuel, feed, etc.)
    • Accurate inventories of crops in storage, hogs on hand and other current assets: Starting point to determine feed needs and budgeting crop and livestock sales for period in budget.
    • Accurate accounts payable: Must be part of the cash flow budget since it is a cash drain on the business
    • Accurate starting point for operating line: Accrued interest needs to be calculated and then budgeted.
    • Loan balances and loan repayment obligations
    • Don’t forget personal assets including non-farm businesses and debt including credit cards


Historical Accounting and Production Records

  • Improves the accuracy of the cash flow as we refer to the past.
  • May indicate trends in the business that need to be accounted for in the cash flow budget. (Feed conversion has been improving over time.)


What software tools are available to do a cash flow?

A computer spreadsheet, like Microsoft Excel, is an excellent tool. You can develop cells for each month across the top and cells for each input item down the side. Use the features of the spreadsheet to add columns and rows and do calculations needed to evaluate the cash flow.


In Minnesota, we use the Finpack program developed by the University of Minnesota through the Center for Farm Financial Management. Other land grant colleges and private vendors may have similar computer programs. This type software does many of the calculations needed to evaluate the cash flow and insures that all the necessary inputs that affect cash flow are accounted for.


What are the steps to establishing a cash flow budget?

1. Start with an accurate Balance sheet.

  • The Balance sheet contains starting point information used to project the flow of cash
    • Checkbook balance indicates cash reserve at beginning of budget year
    • Crop inventories indicate Feed Carried over for use in budget year
    • Crop inventories indicate old crop bushels to sell in budget year
    • Livestock inventories assist with scheduling of sales
    • Loan information is used to schedule loan payments

2. Establish Livestock and Crop budgets –See figure 1 Finpack Enterprise Budget

  • Establish livestock and crop production goals (examples)
    • Pigs sold per litter
    • Pounds of corn per litter or hundred weight
    • Vet Costs per litter or head
    • Purchased Feed per litter or head
  • Include all expected revenue and direct expense including home grown inputs
  • Develop Budget on common units of production—litters, head, hundred weights
  • Multiply costs and incomes in the enterprise budget by the units produced
    • Electronic software can be used to do the math
    • This allows you to vary the production unit amounts easily
  • Budgets developed by electronic software make it easy to change input costs, income and production units
  • Only Direct Expenses are included in enterprise budgets


3. Prepare the budget (See Figure 3)

  • Estimate production units for each budget period (litters farrowed in March)
    • Production units are multiplied by enterprise budgets to get cash flow by month
    • Programs like Finpack make these calculations automatically as input is entered for each month
  • Project livestock sales
    • Estimated sales volume per month and expected price are used
  • Project other expenses not included in enterprise budgets
    • Other direct expenses like fuel and repairs
    • Overhead expenses like insurance, legal fees, utilities, rent
    • Make sure you budget any accounts payable from previous year
  • Project other incomes like government payments, custom work income contracting fees, off-farm income
  • Project Family living expense by month (typical farms spent around $50,000 for living in 2003)
  • Project capital purchases you plan to make for the year.
  • Project your loan payments for the year
    • Operating note is account where cash flow surpluses and shortages accumulate
    • When cash flow is short, loan advance credited to operating loan
    • When the cash flow has surplus payment made to operating loan
    • When operating loan paid off surplus goes to checking account
    • Be sure to budget accrued interest expense on operating loan
    • Make sure other note payments are scheduled including new capital purchases that are financed


What Other factors should be considered in doing a cash flow budget?

Developing cash flow budgets is partially simple number crunching, but it is also an art. There are intangibles that can effect the outcome of the budget and it’s accuracy. I call these items producer tendencies. You need to know your tendencies and adjust for them in the cash flow.


Producer Tendencies and solution to offset tendency

  • Producers are too optimistic about production
  • Offset tendency by using production from 5 year average from farm records
    • Pigs sold per litter
    • Yield per acre
  • Don’t forget to account for death loss in livestock
  • Producers expect higher prices that may be realistic
  • Offset tendency by looking at USDA projections of price
  • Producers project expenses lower than may be realistic
  • Offset this tendency by using 5 year average for expenses that vary a lot from year to year
    • Look to last years records for expenses like utilities and insurance
      • Some expense items increase over time so a 5 year average does not work and does not reflect the current situation
      • Increase these expenses a % amount each year


The key thing to remember is to be aware of your tendencies and adjust for them in your cash flow.


Cash Flow Evaluation

  • Operating loan balance—See Figure 3 Finpack Cash Flow Budget
    • If balance is higher at the end of the year than beginning, the business is not cash flowing
    • Large crop inventory can offset high balance at end of year
    • Lenders want operating note to zero out sometime in production year
  • Projected check book balance—See Figure 3 Finpack Cash Flow Budget
    • Called cash flow surplus
    • Need enough cash flow surplus to cover the unexpected.
  • Cash flow should project a profit—See Figure 2 Cash Flow Analysis
    • If it does not, take a hard look at your projections to see if you can make changes to your business and improve profits
    • You must follow through with the business changes you make
  • Cash flow should project net worth gain.—See figure 3 Cash Flow Analysis
    • Net worth gain best indicator of farm financial progress
  • Term Debt Coverage Ratio above 125%–See Figure 2 Cash Flow Analysis
    • Insures a 25% cushion for the unexpected
    • Interest expense ratio should be no more than 10%–See Figure 2 Cash Flow Analysis Calculated by dividing interest by total revenue
Figure 1. Finpack Enterprise Budget. Livestock Budget No. 1
Livestock Enterprise: Hogs, Farrow to Finish Budget Unit: Per Litter
Description: Long Range Year 1
Raised Hogs
Quantity (head) 7.5 7.5
Weight (lb) 245 245
Price (cwt) 40 40
Product Income 735 735
Marketing 10 10
Purchased Feed 187 187
Breeding Fees 26 26
Total Direct Expense 243.5 243.5
Labor Hours
Corn Equivalents (bu) 75 75
Hay Equivalents (ton)
Silage Equivalents (ton)
Pasture Equiv (aum)
Soybeans Equiv (bu) 10 10
Feed Expense 223.75 223.75
Return over budget expense 307.75 307.75



Figure 2. Cash Flow Analysis Projected Net Farm Income
Gross Cash Farm Income 62,665,21
Cash Farm Expense (Exc Int) (-) 430,027
Farm Interest Paid (-) 10,020
Net Cash Farm Income (=) 186,474
Current Inventory Change (+/-) -51,290
Estimated Depreciation (-) 57,662
Projected Net Farm Income (=) 77,523
Depreciation (+) 57,662
Term Debt interest (+) 10,288
Balance for Term Debt Pay (=) 87,151
Scheduled Term Debt Payments 52,160
Refinance & Capital Sales (-) 0
Normal Term Debt Payments (=) 52160
Term Debt Coverage Ratio 167.1%
Capital Replacement Margin 34,991
Projected Net Worth Change
Projected Net Farm Income 77,523
Efficiency Measures
Operating Expense Ratio 74.6%
Depreciation Expense Ratio 10.0%
Interest Expense Ratio 2.0%
Net Farm Income Ratio 13.4%


Figure 3. Finpack Balance Sheet, Partial Printout

Cash Inflows Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Beg Cash Bal -64,093 1000 1000 1000 1000 1000 1000 1000 1000 1000 14,583 1000 -64,093
Raised Hogs 84,143 39,249 39,249 40,993 40,993 40,993 40,993 39,249 34,888 34,888 34,888 34,888 505,415
Feed Corn 42,000 42,000
Feed Soybeans 24,450 24,450
Cull Stock 2440 2440 2440 2440 2440 2440 2440 2440 2440 2440 2440 2440 29,280
DCP Payments 10,656 10,656 21,312
Custom Work 3464 3464
Pat Dividend 600 600
Total Inflow 22,490 42,689 53,345 44,433 45,033 86,433 44,433 42,689 41,792 73,434 51,911 38,328 562,428
Cash Outflows
Seed 14,448 8440 22,888
Fertilizer 13,760 13,760
Chemicals 26,810 26,810
Crop Insur. 6225 3956 10,181
Drying Fuel 5160 5160
Pur. Soybean 433 5793 5793 5793 17,811
Purch Feed 8045 7870 7719 7578 8824 10,667 10,667 10,667 10,667 10,667 10,667 10,667 114,709
Breeding 1586 1586 1586 1586 1586 1586 1586 1586 1586 1586 1586 1586 19,032
Veterinary 486 492 498 504 550 609 609 609 609 609 609 609 6793
Lstk supply 426 433 441 448 502 572 572 572 572 572 572 572 6257
L. Marketing 1212 487 487 487 487 487 487 487 487 487 487 487 6568
Fuel & Oil 905 905 905 1810 1810 1810 905 905 2714 2714 2714 905 19,000
Repairs 1762 1762 1762 3524 3524 3524 1762 1762 5286 5286 5286 1762 37,000
Labor 1458 1458 1458 1458 1458 1458 1458 1458 1458 1458 1458 1458 17,500
Land rent 7510 38,373 3742 16,234 7966 73,825
RE Taxes 1767 1767 3534
Farm insur. 3400 3400 6800
Utilities 1667 1667 1667 1667 1667 1667 1667 1667 1667 1667 1667 1667 20,000
Misc. 200 200 200 200 200 200 200 200 200 200 200 200 2400
Fam living 4167 4167 4167 4167 4167 4167 4167 4167 4167 4167 4167 4167 50,000
Income Taxes 7834 7834
Min end bal 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Tot. outflow 22,913 22,027 29,399 85,083 39,724 31,579 30,873 30,873 36,206 36,638 57,530 77,016 488,861
Opr Surplus -423 20,662 23,946 -40,650 5310 54,854 13,561 11,816 5586 36,796 -5619 -38,688 73,568
Annual Operating Loan Transactions & Balances
Beg AO Bal 59,176 60,224 59,911 37,235 82,017 77,701 38,459 25,891 15,068 10,756 6612 59,176
AO Borrowing 1048 44,783 6612 42,565 95,008
AO Int Pay 645 698 281 >62 1685
AO Prin. Pay 313 22,676 4317 39,242 12,568 10,823 4312 10,756 105,007
End AO Bal 60,224 59,911 37,235 82,017 77,701 38,459 25,891 15,068 10,756 6612 49,177 49,177
Accrued int. 219 433 132 422 136 228 38 38
End Cash Bal 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000




The process of developing a cash flow budget for the accounting or production year can give producers new insight into their farm business. Cash flow budgeting helps producers focus on the future of their business as they try to project how well the mix of assets, debt, revenue and expense will perform in a future time frame.


Producers are required to think about marketing their products for the coming year as they project out what months hogs will be sold and at what price. In effect they have developed a marketing plan when they establish a cash flow budget.


As producers establish a budget, they develop a loan repayment plan. They have a new sense of what it takes to make these payments and how much more debt they can service.


Producers who do a cash flow budget have set cost control goals as well. They have projected costs, both direct and overhead, that will be incurred by the business during the year. They develop a good sense of the margin they are working with and work to preserve that margin by controlling costs.


The cash flow budget can be used by producers to measure how well they are advancing to meet the goals they established for their business.


Yes the cash flow budget may be required for the acquisition of capital from lenders. But if we look at this exercise of projecting income and expenses as a way of taking more control of our farm business and make us a more disciplined marketer and purchaser of inputs, we will see the true economic impact of spending the time to develop the cash flow budget.




Finpack Computer Software and User’s Manual from Center for Farm Financial Management, University of Minnesota, 249 Classroom Office Building, 1994 Buford Avenue, St. Paul, Minnesota 55108 Phone 800-234-1111


Reference to products in this publication is not intended to be an endorsement to the exclusion of others which may be similar. Persons using such products assume responsibility for their use in accordance with current directions of the manufacturer. The information represented herein is believed to be accurate but is in no way guaranteed. The authors, reviewers, and publishers assume no liability in connection with any use for the products discussed and make no warranty, expressed or implied, in that respect, nor can it be assumed that all safety measures are indicated herein or that additional measures may be required. The user therefore, must assume full responsibility, both as to persons and as to property, for the use of these.


Information developed for the Pork Information Gateway, a project of the U.S. Pork Center of Excellence supported fully by USDA/Agricultural Research Service, USDA/Cooperative State Research, Education, and Extension Service, Pork Checkoff, NPPC, state pork associations from Iowa, Kentucky, Missouri, Mississippi, Tennessee, Pennsylvania, and Utah, and the Extension Services from several cooperating Land-Grant Institutions including Iowa State University, North Carolina State University, University of Minnesota, University of Illinois, University of Missouri, University of Nebraska, Purdue University, The Ohio State University, South Dakota State University, Kansas State University, Michigan State University, University of Wisconsin, Texas A & M University, Virginia Tech University, University of Tennessee, North Dakota State University, University of Georgia, University of Arkansas, and Colorado State University