Farming as a business contains pretty dramatic seasonal variation. This means it can be challenging to know the best time to make a large purchase or rearrange spending to avoid a cash crunch. One way around this is a financial projection method known as a cash flow budget. Cash flow budgets are designed to predict the monthly inflows and outflows of a business, which shows when you’re more and less likely to have extra cash over the course of a season. Such information is especially valuable to farmers.
Here’s how to begin compiling a cash flow budget for your farm.
Project Your Inflows
The first step in assembling a cash flow budget is to quantify your farm’s projected inflows, the money you expect your farm to take in over the course of the season. To project your farm’s business activities, identify each of its sales channels, such as your CSA, wholesale accounts or farmers markets. Next, review any records you have to determine how much each of these enterprises made during each month of the previous season. Place these numbers in a spreadsheet and adjust them to account for any changes you plan for your farm this year. If you plan to increase your CSA membership by 20 percent, for instance, scale up your CSA income projections.
Aside from selling products, other inflows to your farm might come from investment sales if, for instance, you were to sell off old equipment or a parcel of land. Inflows can also come from financing in the form of a grant or loan.
After you’ve listed the different inflows you expect your farm to take in, create a row labeled “Total Inflows” that adds up your inflows for each month.
Project Your Outflows
Once you’ve projected your farm’s monthly inflows, the next step in a cash flow budget is to predict your farm’s outflows, or expenses. Similar to inflows, the majority of your farm’s outflows come from the regular expenses of operating a farm, including items such as labor cost, seeds and irrigation supplies.
You can group your farm’s operating costs in a variety of different ways, but I prefer to break them into direct and indirect expenses. Direct expenses include supplies that you purchase throughout the season to keep the farm running, including seeds, potting soil or irrigation parts. Labor is also considered a direct expense, so include salaries for your workers and yourself in this section.
Indirect costs (or overhead costs), on the other hand, are generalized expenses that keep your farm running, and include things such as accounting software or repairs to your tractor. Your farm might also experience investment outflows if you purchase equipment, or financing outflows if you are repaying a loan.
Once you’ve listed your farm’s projected outflows, create a row labeled “Total Outflows” that sums up your outflows for each month.
Compare Your Inflows & Outflows
By comparing your inflows and outflows for every month in this cash flow budget, you can see when your farm might face a cash crunch or when you can expect to have some extra money to make an investment you’ve been deferring. To do this, create a final row at the bottom of your table labeled “Cash Balance” that adds together your total inflows and outflows for every month. For an example of how to format your table, refer to the examples given in this handout.
Are there months where your farm’s expected cash balance is negative? If so, maybe there are purchases you plan that you can delay. Or maybe, with enough notice, you can find a way to increase your inflows for this period. Maybe there are also months when you expect your farm’s cash balance to be substantially positive. These can be great times to plan to save money or make larger purchases for your farm.