Module 2

Financial Management
in
Agriculture
Budgeting and Cash flow Management in
Agricultural Enterprises
Cash flow budgeting
“Plan for profits and then work your plan.” That phrase
best describes the value of cash flow budgeting. The
planning function of management is one of the most
important for the farm manager and completing a cash
flow budget is an excellent tool for doing so.
The cash flow budget is a plan of how cash will be
coming into the operation (cash inflows) and leaving
the operation (cash outflows). The keyword is “cash.” If
cash is not entering or leaving one’s pocket, then it does
not go on the cash flow budget.
The cash flow budget provides three
primary values for the farm manager:

1. Forces the planning function of management.

2. Provides a means of communicating the amount

and timing of borrowing and investment needs with
the lender.

3. During times of low profitability, cash flow is a

survival strategy.
What makes up a cash flow budget?
A cash flow budget consists of cash coming in (+) or leaving
(-) the business.

+ Cash inflow from operations

+ Capital assets sales
+ Non-farm sources of income which should be included
if used to pay farm bills

– Cash outflow from operations

– Capital asset purchases
– Non-farm outflows of cash including family living
– Debt Service
New Borrowing

= Net Cash Flow

“Net Cash Flow” must be positive or at least zero

(breakeven). While it can be negative on a
spreadsheet, in real life it must be at least zero even if
that means bills and debt service are not getting paid.
What the cash flow budget is not:
The cash flow budget is not the same as an
income statement, especially an accrual income
statement, and in-fact they can be quite
different. The cash flow budget does not include
non-cash items like depreciation, inventory
changes and changes in accounts
receivable/payable. However, the cash flow
budget does include principal payments, cash
payments for capital assets and new loan
proceeds that the income statement does not
include.
A farm manager can cash flow very nicely for a
while by just selling a few cows, pieces of
machinery, acres of land or just allowing accounts
payable to continue to build. The accrual income
statement will quickly identify this situation as
unprofitable, but the cash flow budget will see a
positive. Positive cash flow does not mean
profitability or visa versa.
The cash flow budget is also not a substitute for
the enterprise budget. The enterprise budget
includes depreciation and opportunity costs, both
of which are non-cash items not found on the
cash flow budget.
The Importance of Working Capital
Management
Proper management of working capital is
essential to a company’s fundamental financial
health and operational success as a business. A
hallmark of good business management is the
ability to utilize working capital management to
maintain a solid balance between growth,
profitability and liquidity.
A business uses working capital in its
daily operations; working capital is the
difference between a business's current
assets and current liabilities or debts.
Working capital serves as a metric for
how efficiently a company is operating
and how financially stable it is in the
short-term.
Key takeaways
The goal of working capital management is to
maximize operational efficiency.

Efficient working capital management helps

maintain smooth operations and can also help to
improve the company's earnings and profitability.

Management of working capital includes inventory

management and management of accounts
receivables and accounts payables.
Efficient working capital management
helps maintain smooth operations and can
also help to improve the company's earnings
and profitability. Management of working
capital includes inventory management and
management of accounts receivables and
accounts payables. The main objectives of
working capital management
maintaining the working capital operating
cycle and ensuring its ordered operation,
minimizing the cost of capital spent on the
working capital, and maximizing the
return on current asset investments.

An effective working capital management

system helps businesses not only cover
their financial obligations but also boost
their earnings.
Cost analysis and Cost control
strategies
What's cost control?
Cost control is managing costs to achieve or
maintain the required profitability, efficiency,
or competitiveness. Cost control may include
the identification and analysis of costs, the
development and implementation of budgets,
cost-effective methods and tools, and the
development and implementation of effective
cost-reduction strategies. Using cost control
techniques improves a company's financial
performance while reducing costs.
What's the importance of cost
control?
Cost control helps corporate accounting officials
maintain a clear budget, which keeps their
financial resources stable and promotes
increased profits.
In addition, monitoring costs through informed
budgeting helps the company stay on track
while maintaining high profitability so that
revenues are higher than the project's cost,
thereby increasing the company's financial
resources.
Cost control factors:
Employment costs:
It is the sum of the wages paid to its work team, including staff
development, training, and creating an appropriate working
environment.
Material costs:
The total cost of all tools and equipment required for the
project is the cost of the materials. This includes requested
material before, during and once the project is completed.
Actual cost:
The actual cost is the total expenditure incurred by a project
from the start to the end. This includes the cost of labor and
expenses related to the project.
The cost difference:
The cost difference refers to any price
difference between the actual cost of
the project and the budget identified.
Return on investment (ROI):
The return on investment (ROI) is the
project's profitability, compared to the
amount invested.
Top 5 technologies that will help you
control costs:
1- Consider budget planning:
It will need to establish a fixed budget at
the beginning of the project planning
session, including all payments and the
costs to be borne during the project's life
cycle.
It is also important that the budget be
flexible and adjustable in anticipation of
changing market prices.
2- Tracking costs:
It is better to prepare budgets, monitor operational
costs, and analyze deviations that will help you track
the project budget at each stage.
If the project is extended, it is important to track
monthly, weekly, or even annual costs.

3- Time management:
Time-effective management is one of the most
important methods of cost control. Although this
technique applies to different management areas, it is
essential for project cost control.
Time management is important in meeting
project deadlines, achieving the target, and
gaining planned income, as long as the cost set
during the project period is not exceeded.

4- Use of change control systems

Change control systems are vital methods
necessary to consider any possible changes
during the project journey. Any change in the
project implementation period would impact
delivery deadlines, affect the implementation
plan, and thus cost the project.
5- Keep track of the money you've made.
To determine the value of the work carried out
so far, a financial accounting technique known
as "acquired value is beneficial. "The value
gained is tracked as an effective means of
implementing large-scale projects and is flexible
enough for emergency changes requiring
immediate intervention. However, it is essential
to constantly review the budget, ascertain
financial and budgetary information, and track
costs.
 What are the cost control strategies?
 Inventory management
In this strategy the inventory levels are effectively managed to
avoid overstocking or understocking, by monitoring and
controlling inventory, organizations can minimize carrying
costs, reduce the risk of obsolete stock, and optimize cash flow.

Supplier management
This focuses on developing strong relationships with suppliers
to negotiate favorable pricing, terms, and conditions. What’s
more, effective supplier management also involves selecting
reliable and cost-effective suppliers, maintaining clear
communication, and fostering collaborative partnerships to
drive cost savings and improve overall supply chain efficiency.
Process optimization
Process optimization aims to streamline operations,
eliminate inefficiencies, and reduce costs. This is done
by analyzing and improving workflows, identifying
bottlenecks, automating repetitive tasks, and
enhancing productivity through continuous
improvement initiatives.

Waste reduction
The waste reduction strategy aims to minimize waste
generation and maximize resource utilization. This is
achieved by implementing recycling programs,
optimizing production processes to minimize scrap or
rework, and promoting sustainable practices.
Pricing strategies
Pricing strategies involve setting
competitive prices that balance customer
value and profitability. This may include
strategies such as value-based pricing,
cost-plus pricing, or dynamic pricing. By
analyzing market dynamics, customer
demand, and cost structures,
organizations can optimize pricing to
maximize revenue and achieve
profitability
THANK YOU!