Agriculture Reference
In-Depth Information
When Doug Davies prepares his cash fl ow statement, he will follow the steps outlined in
the following section on budgeting. With the help of his planning committee, he will esti-
mate from both his existing business and the one he hopes to acquire his cash receipts and
cash payments. These estimates in reality become goals or budgeted fi gures, so careful and
honest input is needed. Both cash receipts and expenditures are recorded on a month-to-
month basis during the period, the end result being the cash balance at the end of the period.
A goal must be set to determine whether the amount is suffi cient ( Chapter 10 ) . For example,
Doug might decide that the cash equivalent of a certain number of days' sales, or a certain
percentage of current liabilities, would be the benchmark or goal.
If the cash balance is inadequate, then short-term borrowing or other adjustments
might be needed. If the cash balance is larger than needed, the excess can be invested
temporarily in marketable securities, other income-producing assets, or used to reduce
current or long-term debt. The cash fl ow statement can help the manager to decide whether
there is a need for short-, intermediate-, or long-term loans or equity capital. If the cash
amounts are suffi cient at certain times and inadequate at others, short-term capital is needed.
If there is a persistent trend on the inadequate side, intermediate- or long-term capital is
needed.
Budgeting: a tool used to determine future borrowing needs
A budget is a specifi c forecast of fi nancial performance that is used as a tool for not
only control of a business, but also for determining future borrowing needs and repayment
schedules. An organization may have a cash budget, a capital budget, an advertising budget,
and a research and development budget. The size and complexity of the organization will
determine the kinds of budgets that are needed for success. A small business may need only
an overall budget with different sections, such as sales, production, and fi nance. A large
business may have budgets for departments, divisions, regions, products, etc. Budgets may
be either short term or long range. A short-term budget is generally one that will be imple-
mented within a year, and it usually requires shorter reporting periods. A long-range budget
is two or more years in implementation and is usually reported on a semiannual or annual
basis. The short-term budget, therefore, becomes a component in reaching the long-range
budget objectives. Budgets may also be prepared for specifi c projects. Examples here
might include constructing a new building, launching a new program, or introducing a new
product.
It is important to recognize that budgets help determine organizational direction. Investing
in or reducing the fi nancial and human resources devoted to the different areas of the
agribusiness determines the long-run direction of the fi rm in terms of growth, new
products, and size. With the allocation of resources, managers bring the company's vision
and mission to life. Budgets should refl ect the priorities and directions or goals of the
business.
For example, as Doug Davies considers the purchase of the lumberyard, the management
team may decide to actively seek a larger share of the commercial building market. In turn,
the capital, marketing, and cash budgets would need to refl ect this objective. Doug's capital
budget might be revised to provide more resources for production facilities to serve the com-
mercial building market. The marketing budget might well show expanded investment in
advertising and promotion, as well as additional sales personnel who would focus on the
commercial building market. The cash budget would then refl ect the impact on cash infl ows
and outfl ows that would result from this change.
 
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