Financial Decision Making Course Use for exercise completion

Transcription

1 The Case is provided to you as an alternative to using your own financial data. Using the Case data you can complete the following exercises: I.Net Worth Statement exercise II.Income Statement exercise III.Statement of Cash Flows exercise IV.Statement of Owner Equity exercise V.Analyzing Financial Statements exercise VI.Cash Flow Budget exercise Website addresses for various resources you ll need are provided. You can click on links in the Exercises section of the Financial Decision Making course to avoid the need to type the URLs in this document as you are completing the exercises. The Exercises section also includes directions on the use of your own farm s financial data to complete the exercises. You may want to wait until you complete all exercises to submit them together or submit them as you go. It's up to you. There are four options for submitting exercises in the Financial Decision Making course: 1) You can submit the exercises within BlackBoard Learn. 2) You can mail them to: Tim Eggers Iowa State University Extension 311 East Washington Street Clarinda, IA ) You can them to teggers@iastate.edu as an attachment. 4) You can fax them to Background Andy always wanted to farm. He attended Iowa Lakes Community College and got a degree in Ag Production Technology. He went to school and farmed with his folks at the same time. Ann grew up on a farm and decided to become a teacher. She was able to return to a nearby community to begin her teaching career. She enjoyed the farming lifestyle as a child and hoped to provide that to her children. Andy and Ann met, and they are the decision makers in our case. Andy was cash renting 300 acres from Charlie Goettsch, a retired farmer, in Cherokee county when he met Ann. After they had been married for a few years a farm came up for sale with a decent house. With help from Ann s parents, a beginning farmer loan, and a willing lender they were able to buy the home and 160 acres. Soon after, Andy was able to rent another 140 acres owned by a doctor in California. Doc Warbler has bought farmland elsewhere, and he s interested in buying more land in 1

2 Cherokee county. Andy would like to get Doc Warbler on a flexible cash lease. They rent another 200 acres from Ann s Aunt Esther Jones who lives in the neighboring town. Esther and her husband retired from farming years ago. When Esther s husband died, she moved from crop share to cash rent and a new tenant Andy. Andy has enjoyed working with her. A major change to their operation in 2016 is that Andy will be share leasing 400 acres from his Dad. Andy is also picking up 140 acres that his Dad had share leased. Andy is working with two new landowners, his father and Jack Carlson. Current Situation Andy and Ann are in their 30s and have two children. They would like to make larger contributions to the children s college funds. There was stress with increasing cash rents and costs of production occurring hand-in-hand with increased crop prices from 2007 through Now that cash rents and fertility costs are declining, a different kind of uncertainty is occurring. Andy has been sharing articles about declining farm profits with his cash rent landowners. The changes they ve agreed to so far have been fair. For 2016 they ve agreed to lower the cash rent by the amount that Andy is paying for a lime application. Both Aunt Esther and Charlie Goettsch are getting forgetful. They re calling to discuss little issues, and they re calling more frequently. Aunt Esther asked whether Andy and Ann would like to buy part of her farm. He s considered putting Aunt Esther in contact with Doc Warbler, and he wonders if he should be communicating with Charlie s children. Andy has a tractor, planter, mower, good pickup, and some attachments. He s been paying his Dad $15 an acre to use his sprayer, combine, heads, tractor-trailer, and grain cart. In 2016 he ll be buying the sprayer and continuing to pay the $15 per acre for the other equipment. He hopes they can continue to farm together. Andy is grateful to be farming some of his Dad s acres as the tenant, and not an unpaid hired hand. Andy s father has kept some of his crop share leased land as he tries to unwind tax complications. Andy is trying to balance access to other landowner s acres and keeping his father s skilled labor. Marketing crops below break-even in recent years and seeing working capital decline was not pleasant s high yields and better than expected ARC-CO corn payments were welcome. In general Andy and Ann have been doing well financially. Ann s teaching provides a steady income and benefits. Farming in a golden age helped. Andy likes helping his parents, and they always seem to have things to keep him busy. Their children have kept him busy during the school year when Ann s coaching basketball and cross country. Now that the children are older, he s ready to take over more of his parent s operation. The interest rate on the farm home and land loan is locked in. Increasing interest rates for his operating note and any future borrowing is a concern. 2

3 Andy knows he needs to find answers to some questions as he s taking over his father s operation. You ll find answers to many of Andy s questions as you complete the exercises. The questions are provided for you to think about the answers your own financial statements provide. Andy s general financial management questions: Is my farming business making money? If not, what can I do about it? How much capacity does my operation have to take on additional debt? What kind of return am I earning on my investment? Is my farm a good place for me to invest? How will 2016 s lower prices affect my cash flow? Will I have enough cash? Will taking on the ground my father farms improve our situation? January 1, 2015 Net Worth Statement/Balance Sheet 3

4 I. Net Worth Statement exercise - Complete a current net worth statement for your own farm or. If you use your own farm's data, you could create the statement with the ISUE tools or submit a recent statement. Review your farm s Net Worth Statement carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? Are the differences plausible? There may be more than one way to represent assets or liabilities. Your lender may have a preference about how things are shown. The most important rule is to be consistent in how you prepare your statements from year to year. Consistency insures that comparisons through time are meaningful. If you use the third option below to complete the exercise, you'll notice that the beginning schedule and beginning net worth statement are completed. Your task is to complete the ending schedule and ending net worth statement using the data. For the Net Worth Statement exercise enter data in the End Schedules worksheet first, then see what data may need to be entered on the End Net Worth worksheet. All four exercises associated with the Developing Financial Statements module use the same tools. The choice you use for the Net Worth Statement exercise will determine what you use for the Income Statement, Statement of Cash Flows, Statement of Owner Equity, and Analyzing Financial Statements exercises. If you re using a spreadsheet be sure to save the file in a location that you can access through completion of the exercises. You can use one of the three following tools: 1) Farm Financial Statements worksheet from the Ag Decision Maker This option is for those who would prefer to complete the exercises by hand and use a calculator rather than using a spreadsheet. You could use your own or the data. has the same schedules beginning on page 5 that are referred to below. The results of those schedules will need to be entered in the Net Worth statement on page 2 of the pdf file. 2) Farm Financial Statements spreadsheet from the Ag Decision Maker This option is for those who prefer to use a spreadsheet and their own data. will require the use Microsoft Excel or a compatible spreadsheet program. 3) Farm Financial Statements Smith Example spreadsheet This option is who would prefer to use a spreadsheet and the data. requires Microsoft Excel or a compatible spreadsheet program. It is the Comprehensive Financial Statements spreadsheet available at link #2 above. However, Andy s Beginning Schedules and Beginning Net Worth statement have been completed in the spreadsheet so the rest of the exercises will work. 4

5 Step 1 in completing the Net Worth Statement exercise is entering the current inventory for January 1, Andy inventoried his operation and found the following current assets. He used the Suggested Closing Inventory for 2015 Records below. is a link to the current version. The yellow cells can be used for data entry. White cells are calculated or protected. Farm checking account 1/1/16 $37,704 Crops Held for Sale or Feed Quantity Unit Price Value Corn 33,340 33,340 bu. $3.40 $113,356 Soybeans 4,450 4,540 bu. $8.40 $38,136 Prepaid Expenses Quantity Unit Price Chemicals and Fertility 1 Farm Pre $34,883 $34,883 Seed Corn 300 acres $110/acre $33,000 Seed Soybeans 285 acres $61/acre $17,385 Supplies on Hand Quantity Unit Price Oil, grease, & filters 1 Bbls & sticks $1,500 $1,500 Fuel 800 gallons $1.62 $1,296 Accounts Receivable USDA-Farm Program Payments $22,000 After entering the data above in the End Schedules worksheet of the spreadsheet, click on the End Net Worth tab to see how the calculated values are transferred. Then click on the End Schedules tab again to continue entering the data. In the Machinery and Equipment schedule note that the previous cost value of Andy s equipment was $81,000. They re using a 10% depreciation rate. He estimates his current market value for the equipment at $158,400. The current market value for pickups is estimated at $34,425. In the Buildings and Equipment schedule note that the previous cost value of their buildings was $23,750. They re using a 5% depreciation rate. Andy estimates his current market value for the buildings at $50,000. In the Farmland schedule note that the previous cost value of the Home Place was $459,680. The Home Place is the 160 acre parcel they purchased. The land market has been softening. They use data from the ISU Land Value to estimate the current market value for the land at $9,219 per acre. In the Securities and Certificates (farm-related stocks, bonds, CD s, etc.) schedule Andy added 5,000 to last year s CD value of $28,250. It earned $99 in interest. Summing those gives a Value of New Purchases & Investments of $5,099 It s now worth $33,349. His goal is to build funds for future equipment purchases. 5

6 In the Current Notes and Credit Lines schedule they ended the prior year with a zero balance for the operating note of $0. The last payment was on 12/1/2015. He s paying a 6% interest rate for operating money. In the Fixed Notes and Contracts schedule Andy is down to a land note. Their final payment on their equipment note to John Deere was $28,049 and almost a year s interest. The last payment was on 12/10/2015. The interest rate on that note was 3%. They owe the Local Bank $195,188 on the home and farmland note. The principal due, next 12 mos. from the schedule is $21,950. Their last payment was on 3/1/2015. The interest rate on that note is 5%. After entering the data above in the End Schedules worksheet of the spreadsheet click on the End Net Worth tab to see how the calculated values are transferred. The Personal Assets section of the balance sheet has no information. If you have entered the data as listed above, you are now ready to submit the Net Worth Statement exercise. You may do so now, or choose to wait and submit all exercises at once. 6

7 Questions triggered by completion of the Net Worth Statement: What happens if the ARC-CO payment I m expecting doesn t materialize? How do I guess at farm program payments for future years? relies on estimated Market Year Average prices and yield estimates. Does my lender have a handle on that number? How do I evaluate whether to back off on the prepay that I ve been practicing for the past few years? How do I evaluate taking the Section 179 depreciation? It really bit me this year with an equipment payment and no depreciation expense left. I ll be buying some of Dad s equipment and renting the rest. How will that change my balance sheet and cash flow? When will he start charging me for shed space too? Should I have used the CD to have a lower operating note balance? Should I have sold more grain? Why do I always try to carry over the same amount of grain? What s the impact of land values going down? How does that affect my financial position? The equipment note is paid off! Now I can buy Dad s sprayer. It s been getting harder to ignore the letters and postcards dealerships have been sending with rebates and low interest rates. Do Andy s questions bring to mind answers your Net Worth statement has provided recently? How do your financial statements measure progress toward the goals for your farming operation? /F-244web.pdf is a nationally recognized resource for concisely helping farm families set goals. Does your lender require personal assets and liabilities to be included on your balance sheet? Are the personal assets and liabilities included in your ratio analysis? 7

8 II. Income Statement exercise - Complete an income statement for your own farm or the Smith farm. If you use your own farm's data with a recent statement for your farm, review it carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? Are the differences plausible? Sometimes your lender just asks for your Schedule F and makes the accrual adjustments in inventory separately. Your lender may have a preference about how some things are shown. The most important rule when it comes to income statements is to understand the accrual adjustments necessary to go from a cash method to a more accurate analysis of the income for the year. You should continue to use one of the three following tools: 1) Farm Financial Statements publication from the Ag Decision Maker The Net Farm Income Statement form on page 3 of the document. 2) Farm Financial Statements spreadsheet from the Ag Decision Maker Use the Income worksheet. 3) Farm Financial Statements Smith Example spreadsheet Use the Income worksheet. If you re using the spreadsheet tool (options 2 or 3 above) accrual adjustments are made automatically from the beginning and ending schedule balances. If you re using the worksheet in the publication (option 1 above), pay attention to the directions for accrual adjustments. could help. Anne and Andy put the farm s tax information together in a timely fashion. The estimated Schedule F on the following page will provide data for the income statement. They will revisit the statement after filing their income taxes to enter the actual Schedule F results. As you enter the information on the following page notice what s missing or inconsistent. Your depreciation for income tax purposes may not match your calculated depreciation. Remember that interest shows up on two lines, so that will need to be summed to find interest paid. Accrual adjustments can be a positive or negative surprise depending on how they change. 8

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10 If you have entered the data from the Schedule F, and reviewed the accrual adjustments, you are now ready to submit the Income Statement exercise. You may do so now, or choose to wait and submit all exercises at once. Questions triggered by completion of the Income Statement: When it comes to accrual adjustments, lower grain prices alone were almost a $10,000 decrease. The accounts receivable of that expected farm program payment is estimated to not change, but it will. How possible is a zero ARC-CO payment for Cherokee county? Which of the cash costs can I expect to decrease next year? I have less prepaid expense. Is that a bad thing? What if I prepay even less in 2016? 10

11 III. Statement of Cash Flows exercise - Complete a statement of cash flows for your own farm or. A Statement of Cash Flows accounts for cash revenue and expenditures. Most of the values are taken from the previous financial statements. In the spreadsheet, those values are transferred automatically. If you use your own farm's data with a statement for your farm, review it carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? One of the ways it s likely to differ is to be absent. Some private lenders do not use a Statement of Cash Flows to balance cash. You should continue to use one of the three following tools: 4) Farm Financial Statements publication from the Ag Decision Maker The Statement of Cash Flows form on page 4 of the document. 5) Farm Financial Statements spreadsheet Use the Cash Flow worksheet. 6) Farm Financial Statements Smith Example spreadsheet Use the Cash Flow worksheet. They had New loans received of $49,000 during the year, which were advances on their operating line. The Principal repaid was $98,310, including operating line payments and principal payments intermediate and long-term loans. Andy is completing this document for the farm business only. As a result no Nonfarm income was invested in the farm business. The Cash withdrawn from the farm for living, taxes, savings, etc. was $46,449. If you have entered the data as listed above, you are now ready to submit the Statement of Cash Flows exercise. You may do so now, or choose to wait and submit all exercises at once. Questions triggered by completion of the Statement of Cash Flows: Looking at the principal repaid, do I want to borrow more in 2016 or 2017? How can I make sure this farm keeps a positive number in that cash withdrawn from the farm for living, taxes, savings, etc.? What is a good percentage for cash withdrawn of total cash in and out? 11

12 IV. Statement of Owner Equity exercise - Complete a statement of owner equity for your own farm or. All of the values can be taken from the previous financial statements. In the spreadsheet these values are transferred automatically. If you use your own farm's data with a recent statement for your farm, review it carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? One of the ways it s likely to differ is that some private lenders do not use a Statement of Owner Equity to determine the percent of net farm income retained in the business or the cost value of net worth earned as a percent of market value net worth. Some lenders use hybrid land values for consistency in calculating earned net worth. You should continue to use one of the three following tools 1) Farm Financial Statements publication from the Ag Decision Maker The Statement of Owner Equity form is on page 4 of the document. 2) Farm Financial Statements spreadsheet from the Ag Decision Maker Review the Owner Equity worksheet. 3) Farm Financial Statements Smith Example spreadsheet Review the Owner Equity worksheet. The Statement of Owner Equity exercise could be submitted separately, but most choose to wait and submit it with other exercises. Questions triggered by completion of the Statement of Owner Equity: I increased net worth both on the cost and market value side, how much of that was management and how much was good weather/good yields? If a good bit of my market value net worth is because of land values, how much further are they going to fall? 12

13 V. Analyzing Financial Statements exercise - Complete a financial analysis for your own farm or. In the spreadsheet the ratios are calculated automatically. You may ask, Why is this an exercise? if it has already been completed by the spreadsheet. This set of 21 performance measures is critical to understanding how lenders view your operation and how you can benchmark your financial performance. If you use your own farm's data with a recent statement for your farm, review it carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? One of the ways it s likely to differ is that some private lenders use different sets of ratios to analyze farm businesses. Also lenders will focus on specific ratios with clients in different financial situations. You should continue to use one of the three following methods. Note that the tool for calculation by hand changes. 1) Financial Performance Measures for Iowa Farms publication from the Ag Decision Maker For those who would prefer to complete the exercises by hand and use a calculator, has the Information needed tables on page 6 of the document. You will need results from the prior exercises to complete the table. Page 7 has the formulas to use when calculating the 21 ratios. This will take some time, and simple math errors may creep in. Be sure to double-check your math. 2) Farm Financial Statements spreadsheet Review the Performance worksheet. There are only two items for you to enter on this worksheet. 3) Farm Financial Statements Smith Example spreadsheet Review the Performance worksheet. There are only two items for you to enter on this worksheet. has 800 as the Number of crop acres farmed during the past year. Andy estimates the Value of operator and family unpaid labor in the past year at $35,000. Analyzing Financial Statements exercise uses the final worksheet in the Farm Financial Statements spreadsheet and that spreadsheet is often submitted when the first set of exercises are completed. Questions triggered by completion of the financial ratios: 2015 was a good year for me. What did I do differently than others? Liquidity and Solvency are off the charts good. Why am I taking on more debt? How can I keep them strong and grow my operation? 13

14 VI. Cash Flow Budget exercise - Complete a cash flow for your own farm or. If you use your own farm's data with a recent statement for your farm, review it carefully to see if it is consistent with the suggestions in the course. If not, how does it differ? One of the ways it s likely to differ is that few lenders use a month by month or period by period approach. It is most common to have an annual cash flow which closely mirrors the prior year s cash entries in the income statement. You should continue to use one of the three following tools: 1) Twelve Steps to Cash Flow Budgeting publication from the Ag Decision Maker For those who would prefer to complete the exercises by hand and use a calculator, has the form on pages 5 and 6. This will take some time, and simple math errors may creep in. Be sure to doublecheck your math. 2) Cash Flow Budget spreadsheet at the Ag Decision Maker using the Livestock, Crops, Overhead, Capital Assets, Financing, and Whole Farm Budget worksheets to enter your farm s data. 3) Cash Flow Budget spreadsheet at the Ag Decision Maker using the Crops, Overhead, Financing, and Whole Farm Budget worksheets to enter Smith Farms data below. Please read the information in the Getting Started worksheet of the Cash Flow Budget spreadsheet to understand how to enter the data and get useful results. The Cash Flow Budget tool posted at the Ag Decision Maker was revised to better match categories of expenses tracked for income tax purposes. You will see numbers in parenthesis and those numbers refer to the lines in an IRS Schedule F. The change should make it easier for you to use your own Schedule F from the prior year as a starting point if you choose to create the cash flow with your data instead of the Smith Farm data that follows. 14

15 Crops Andy uses six columns for his Crop Enterprise Information. While he currently farms the owned and rented land in the same way, he wants the flexibility of looking at what would happen if he dialed back on inputs on one farm or the other. If he does, then he ll need to enter different yields for the different farms. Name of crop Number of acres in each crop Operator s Share Expected yields bushels per acre Corn Soybeans Own Corn % 181 Own Beans % 55 Goettsch Corn % 181 E&W Beans * % 55 D&C Corn ** % 181 Dad Beans % 55 * E&W Beans is Aunt Esther Jones and Doc Warbler Beans ** D&C Corn is Dad and Jack Carlson Corn Cash production costs per acre (operator s share) - for each of the columns, put in the appropriate cost per acre. If you want to use different numbers, check them against the Estimated Costs of Crop Production at The Estimated Costs of Crop Production in Iowa 2016 publication has more detail than the cash flow budget. A current version of that publication is something that should be right beside your own records from the previous year when estimating your own cash flow. Owned Own Corn (80 acres) Own Soybeans (80 acres) Seed (26) $110 $61 Fertilizer and lime (17) $102 $45 Chemicals (11) $45 $54 Crop insurance (20) $15 $12 Drying fuel (19) $12 Custom hire (13) $5 $5 Machine rental (not lease) (24a) $15 $15 15

16 Andy talked his cash rent landowners into a decrease in the cash rental rate equal to his cost to apply lime to their fields. It s a challenge to get cash rental rates to a fair level. Charlie Goettsch, Doc Warbler, and Aunt Esther are hopeful that cash rental rates will stabilize. Cash Rent Goettsch Corn (140 acres) E&W Beans (500 acres) Seed (26) $110 $61 Fertilizer and lime (17) $137 $80 Chemicals (11) $45 $54 Crop insurance (20) $15 $12 Drying fuel (19) $12 Custom hire (13 $5 $5 Machine rental (not lease) (24a) $15 $15 Andy s approached the topic of non-traditional shares, but both of his current landowners wanted to stay with the standard 50/50 share lease. He had Jack Carlson hooked, Crop Share D&C Corn (340 acres) Dad Beans (200 acres) Seed (26) $55 $35.50 Fertilizer and lime $51 $21.50 Pesticides $22.50 $27 Crop insurance $7.50 $6 Drying fuel $6 Custom hire (13) $5 $5 Machine rental (not lease) (24a) $15 $15 Cash production costs Allocation by period for each time period, put in the % of costs incurred in that period or the dollar amount. Crop insurance and Drying fuel will be incurred during the harvest period. Seed expense could occur early and late in the year expense depending on prepay decisions - likewise with Fertilizer and lime. Pesticides will be incurred before and during the growing season, or it could be late in the year if a portion is prepaid. Allocate the expenses in the time periods you see fit. You may want to see how it affects the cash flow to move an expense earlier or later in the year. Note the warning message that will stay to the right of the table until the expenses are 100% allocated. 16

17 Expected prices are very important. As time passes, expected price turns into actual price. Andy has the following expected prices from bids offered by his market. You ll need to enter them to match the periods of sales of crop in the Allocation of crop sales table. Corn, $/bushel Soybeans, $/bushel January February March April May June July August September October November December $3.52 $3.50 $3.68 $3.32 $3.06 $3.06 $8.41 $8.70 $9.81 $9.94 $9.48 $9.48 Allocation of crop sales is where you ll sell old and new crop. Start by entering Andy s Beginning inventory. Andy started the 2016 calendar year with 33,000 Corn-bushels and 4,500 Soybean-bushels. Andy typically sells his Beginning inventory of stored crops in the first four months of the year. He then sells enough of his New crop production to end the year with no more than 35,000 bushels of corn and 4,000 bushels of soybeans. You ll be able to see his Ending Inventory in the Crop summary section. 17

18 Overhead Andy s Other farm income only includes USDA payments (4a). He s and all of the landowners he works with put their program acres into ARC-CO, and he s planning on a $22,000 payment in October. Andy s Other farm expenses include Real estate taxes (29), Cash rent (24b), Repairs and upkeep, Fuel and lubrication, and Other fixed expenses. His Real estate taxes (29) are $4,550. Half is due in March/April, and the other half is due in September/October. His Cash rent (24b) is $149,400. He makes equal payments in March/April and November/December. He negotiated each landowner down, but that was due to the lime application the fields needed in He pays each landowner a different rate. His estimated Repairs and maintenance (25) for the year is $44,247. When Andy took over his father s equipment he wanted to budget enough to fix some things that had been bothering him for a while. Allocate it in a way that you think it will occur on your farm. Use equal amounts monthly if that s appropriate. His estimated Gasoline, fuel and oil (19) for the year is $22,725. Allocate it in a way that you think it will occur on your farm. Do the same for $4,800 in Utilities (30), $3,000 in Supplies (28), and $2,500 in Property and liability insurance (20).. Andy s Itemized nonfarm expenditures include Family living expenses, Income and other personal taxes, and Contributions to savings, retirement. The 2015 yields were surprisingly good, and without depreciation his tax bill got away from him. Given the lower prices, he s pulling less out of the farm for family living this year. He plans to contribute $20,000 to Family living expenses. Allocate it evenly across each period. He estimates Income and other personal taxes to be $29,673. He ll make that payment in March/April. The sprayer will be on a normal depreciation schedule for taxation purposes. Making a payment and not having a depreciation expense is not something to repeat. He budgeted $5,000 to Contributions to savings, retirement. He also budgeted $5,000 to Other non-farm expenses to match a contribution his parents made to the children s college fund. Those expenses will occur in November/December. 18

19 Capital Assets Andy is buying his Dad s Apache sprayer in January/February. That would go in the Purchases planned section. He s paying $120,000 for it. Financing Andy is getting a New long-term loan. It s noted in the New borrowing expected section at the top of the worksheet. He s borrowing $96,000 for the Apache sprayer in January/February. He ll start making payments on that loan in He ll take the difference between the $120,000 purchase price and $96,000 note out of this year s cash flow. If need be, he can access some funds from the equipment CD. He doesn t think he ll need to though. In the Payments due on existing liabilities, Andy has one Payments due on long-term loans. He has a Local Bank Mortgage that is due in the November/December period with a payment of $27,806. Andy began the year with a Cash on hand, beginning balance of $37,704. He has a 0.25% Interest rate earned on cash balance. It s entered as.0025 not.25. His Operating line, beginning balance is $0. The Interest rate paid on operating line is 6%. Andy s Maximum operating line balance desired is $200,000. Whole Farm Budget Check the Cash Inflows and Cash Outflows summary table to see if there is any missing information. Review the need for New operating loan needed in the SUMMARY section of the Whole Farm Budget worksheet. From period to period, depending on when you complete sales, you are likely to have a negative net cash flow. When that amount exceeds the Ending cash balance of the prior period you will need to borrow (have a New operating loan needed amount) to maintain a positive Ending cash balance. If you have a significant Ending cash balance and you d like to reduce the Operating Loan Balance, you can make an Operating loan repayment. If you have entered the data as listed above, you are now ready to submit the Cash Flow Budget exercise. 19

20 Questions triggered by completion of the Cash Flow Budget: In 2014, I needed an $85,000 line. In 2015, I needed a $52,000 line, but I only used $49,000. Better than expected yields helped again. This year it looks like I need a $210,000 line. I m borrowing $157 per crop acre. How close am I to needing to get more working capital? Will fertility costs continue to decline? Can I get a handle on my herbicide costs? Can I keep $230 as the cash rental rate for 2017? Even with $35 an acre in lime expense, that s 10% below the market average. Is there a little extra P&K I could put on or some improvement I could make to those properties? Would $250 be a better offer for 2017 cash rent? How did Dad handle the recaptured depreciation on the sprayer? Is he ready to handle more of the input costs for a bigger share of the crop? How much longer is the equipment line going to hold? Our family living costs are above $60,000. When we sit down and budget Ann s contribution and my contribution we feel OK about it. The farm pays for part of our family living costs directly. For 2016 I plan to pull $20,000 out for the family budget, and I m putting $5,000 a year away in an off-farm retirement account. If the farm needed to cover all of our family living costs, what changes would we need to make? 20