With ever-changing markets and extreme volatility, forecasting cash flow may seem an impossible task. Although no forecast is ever perfect, the more information you gather and the more often you adjust the numbers to reflect reality, the closer you get to hitting the mark.
"We have so much volatility now that you have to spend a bit more time on your finances and have a good feeling for where you are at," says Dale Nordquist, associate director of the Center for Farm Financial Management at the University of Minnesota.
Forecasting cash flow is especially important in volatile markets in order to have a road map for planning, notes Pauline VanNurden, farm business management instructor at Riverland Community College’s Owatonna, Minn., campus. "It helps you to see what working capital opportunities you can take advantage of and when you need to pull in the reins," she says.
In addition, cash forecasting is important in managing relationships with lenders. When it comes time to approach the bank, having a solid cash forecast and good accounting record can be a huge
help, as banks are coming to expect that level of detail and planning.
In fact, as lending standards tighten, it can mean the difference between a favorable bank relationship and a closed door.
"Bank regulations have changed a lot in the past few years," VanNurden says. "Bankers are under more scrutiny than ever before, and they are scrutinizing their borrowers more as a result. Having a detailed, quality cash flow forecast is tremendously important when a producer is trying to get an operating note, a machinery note, or what have you. It is critical in getting that lender relationship going and continuing to move it forward."
Forecasting the Unexpected. When putting together a forecast, start with a balance sheet, get a handle on current inventories and go from there. Look at the physical side of the business: estimate yields, production levels and market prices to get an idea of revenue potential.
In addition to unpredictable revenue, volatility in inputs can throw forecast numbers into disarray. Most producers actually do a pretty good job of projecting the expense needs of their operation,
Nordquist notes. "It’s the income side, which is also obviously volatile, that is harder to project," he says.
One strategy to help prepare for unforeseen expenses is to put a number in your forecast even for items that you may not expect to come into play. This can help when it becomes necessary to adjust the numbers for changing conditions or to plug in overlooked expenses.
VanNurden suggests using a three-year average on overhead costs that are not directly related to crop inputs so you can understand the trend for such things as repairs, fuel and utilities. "A comparison of three years can give you a good idea of where you sit," she adds.
Looking back at accounting records is helpful when deciding what to include in your cash forecast and to ensure no expenses and receipts are overlooked.
Keep in mind, however, that the past seldom gives an accurate picture of the future, so it is important to look at the present and think to the future as well when plugging in your numbers.
- March 2011