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## Lesson 2. Cash Flow Budgets

**Introduction **

Cash flow budgets provide detail about periods when cash outflows exceed cash inflows. Often, businesses will need extra cash to supplement periods of high cash expenses and debt repayment. Loans are one way to offset cash flow issues if they are estimated properly and timely. Other cash reserves may also factor into the feasibility of a project.

This lesson introduces cash flow budget components, such as cash expenses, debt payments, capital purchases and cash revenues. Students will create a cash flow budget and analyze the condition of the business plan. They will also examine loans and calculate estimated interest costs for operating loans that factor into cash flow budget analysis.

**Learning Outcomes **

After completing the activities included as part of this lesson, students should know and understand the following:

1. Identify the components included in a cash flow budget.

2. Develop a cash flow budget based on data provided about cash expenses and revenue.

3. Calculate estimated interest for an operating loan and use interest and principal amounts for budgeting.

4. Analyze loan feasibility based on projected estimation of interest expense.

**Performance Objectives **

Students will complete the following activities or skills in order to learn the intended outcomes of this lesson:

1. Complete a cash flow budget from data provided.

2. Calculate interest estimation for scenarios provided.

3. Complete Part 2 of a case study to create a cash flow budget from raw data.

**Standards and Benchmarks Alignment **

**AFNR Career Cluster – LifeKnowledge**

**AFNR Career Cluster – LifeKnowledge**

^{®}** and Cluster Skills **

**and Cluster Skills**

**Content Standards **

**Content Standards**

**This lesson will address parts of the following performance elements: **

**CS.03. Performance Element: Career Success: Demonstrate those qualities, **
attributes and skills necessary to succeed in, or further prepare for, a
chosen career while effectively contributing to society.

**AFNR Career Cluster – Agribusiness Systems Career ** **Pathway Content Standards **

**AFNR Career Cluster – Agribusiness Systems Career**

**Pathway Content Standards**

**This lesson will address parts of the following performance elements: **

**ABS.01. Performance Element: Utilize economic principles to establish and **
manage an AFNR enterprise.

**ABS.02. Performance Element: Utilize appropriate management planning **
principles in AFNR business enterprises.

**ABS.03. Performance Element: Utilize record keeping to accomplish AFNR **
business objectives while complying with laws and regulations.

**ABS.04. Performance Element: Apply generally accepted accounting principles **
and skills to manage cash budgets, credit budgets and credit for AFNR
businesses.

**ABS.05. Performance Element: Assess accomplishments of goals and **
objectives by an AFNR business.

**ABS.07. Performance Element: Create a production system plan. **

**Common Core State Standards for High School ** **Mathematics **

**Common Core State Standards for High School**

**Mathematics**

Modeling standards are indicated by the star symbol (*) throughout other conceptual categories.

**Conceptual Category – Number and Quantity **

**The Real Number System ** Use properties of rational and irrational numbers.

**Quantities ** *Reason quantitatively and use units to solve problems.

**Conceptual Category – Algebra **

**Seeing Structure in **
**Expressions **

*Interpret the structure of expressions.

**Seeing Structure in **
**Expressions **

*Write expressions in equivalent forms to solve problems.

**Arithmetic with **
**Polynomials and Rational **

**Expressions **

Perform arithmetic operations on polynomials.

**Creating Equations ** *Create equations that describe numbers or relationships.

**Reasoning with Equations **
**and Inequalities **

Understand solving equations as a process of reasoning and explain the reasoning.

**Common Core State Standards for English Language Arts **

**Common Core State Standards for English Language Arts**

**Range of Reading and **
**Level of Text **

**Complexity **

Read and comprehend complex literary and informational texts independently and proficiently.

**College and Career Readiness Anchor Standards for Writing **

**Research to Build and **
**Present Knowledge **

Draw evidence from literary or informational texts to support analysis, reflection, and research.

**Essential Questions **

Students should consider the following questions as they complete the components of this lesson:

1. How are cash flow budgets different from enterprise budgets?

2. What are the essential components needed for a cash flow budget?

3. Why are cash flow budgets developed?

4. What are cash expenses and revenues?

5. Why does a business need a loan?

6. What is principal?

7. How is interest calculated for a loan?

8. What is interest and why do businesses have to pay interest expenses?

9. How can business plans be altered based on a cash flow budget?

**Vocabulary **

**Cash Expense ** Expenses which include cash items, e.g., purchases of animals,
expenditures for breeding fees, taxes, farm improvements,
machinery, feed, crops, hired labor, interest on farm debts, farm
insurance, etc.

**Cash Flow ** A payment or receipt in the form of cash

**Cash Flow Budget ** A statement of projected payments and receipts associated with
a particular business plan

**Cash Revenue ** Money received from a business operation

**Feasibility ** Capable of being accomplished or brought about; possible
**Interest ** A charge for borrowed money generally a percentage of the

amount borrowed
**Loan ** Money lent at interest

**Principal ** The original amount of a debt or investment on which interest is
calculated

**Instructional Timeline **

**Time: 6 days (based on 45-minute class periods) **

**Day 1 – 2: **

Teacher will introduce the lesson providing an overview of Learning Outcomes, Performance Objectives, and Essential Questions.

Teacher will present PowerPoint^{®}* Cash Flow Budget Components. *

Students will take notes on the presentation.

* Teacher will provide students with Activity 1 – Monitoring the Flow of *
*Cash. *

* Students will complete Activity 1 – Monitoring the Flow of Cash. *

**Day 3: **

* Teacher will review Activity 1 – Monitoring the Flow of Cash and answer *
any remaining questions or clarify confusion about the activity.

* Students will submit Activity 1 – Monitoring the Flow of Cash for grading. *

Teacher will present PowerPoint^{® }*Principal and Interest. *

Students will take notes on the presentation.

* Teacher will provide students with Activity 2 – Costs of a Loan. *

* Students will complete Part 1 of Activity 2 – Costs of a Loan. *

**Day 4: **

* Students will complete the remainder of Activity 2 – Costs of a Loan and *
submit for grading.

Teacher will review learning outcomes from the first two activities and check for student understanding or misconceptions.

* Teacher will provide students Activity 3 – Case Study: Part 2. *

**Day 5 – 6: **

* Students will complete Activity 3 – Case Study: Part 2 and submit for *
grading.

OPTIONAL: Teacher will use the PowerPoint^{®}* Megan’s Project to show *
answers to Part 2 of the case study.

Teacher will provide a quiz or formative assessment to check for student understanding of learning outcomes.

**Citations **

*Oklahoma Cooperative Extension Service. (2012). Cash flow planning, publication *
*AGEC-751. Document retrieved from *

http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-1782/AGEC- 751web2010.pdf

**Teacher Briefs **

**PowerPoint**^{®}** Cash Flow Budget Components **

This presentation introduces students to terms and how to select appropriate data
*for use in a cash flow budget. This presentation must precede Activity 1 – Monitoring *
*the Flow of Cash. *

**Activity 1 – Monitoring the Flow of Cash **

Sum up cash expenses that are paid DURING the growing season. In this case, all expenses EXCEPT depreciation are cash. However, interest on fixed assets is probably not paid during the growing season. Also, taxes are not usually paid during the growing season. Therefore, the grower will be paying interest on $229. This amount is paid out over the growing season, eight months. Over the 8 months, the grower has an average of $114.50 (=$229/2) invested—he starts with $0 on April 1 and ends with $229 on November 30. He pays interest on the average amount for eight months and this value ($5.34) is provided. The rest of the cash flow is

straightforward.

Cash flow budget for corn enterprise (per acre) Sources of cash

Corn sales (100 bu × $3.40/bu) $340.00

**Total sources of cash $340.00 **

Uses of cash

Seed $ 62.00

Fertilizer $ 33.00

Pesticides $ 23.00

Crop insurance $ 8.00

Labor $ 10.00

Fuel, oil, lube $ 58.00

Rent $ 30.00

Interest on fixed assets $ 16.00 Taxes on fixed assets $ 4.00

Repairs $ 5.00

Interest on operating $ 5.34

**Total uses of cash $254.34 **

**Expected net cash flow ** **$ 85.76 **

**PowerPoint**^{®}** Principal and Interest **

To help students understand estimating interest expenses, this presentation breaks down a loan and how to calculate interest. The formula provided is important for students to use for future activities.

**Activity 2 – Costs of a Loan **

This activity applies what students learned from the presentation about calculating estimated interest expense. The following is the answer key to help you examine student work.

**Loan 1 - Laura’s llama project has a cash expense estimate of $8,200. She needs to **
finance 60% of this amount with a loan from her dad at 5% interest. She will need
this loan for nine months until newborn llamas can be sold.

Calculate the estimated interest Laura will expect to pay over the course of this loan – show work.

*($8200/2) x (.05/12) x 9 x .6 = x *

$4100 x .00417 x 9 x .6 = $92.25

**Loan 2 - Kyle found an 8% loan to cover 40% of his expenses for his fishing guide **
business. His budget estimates that he will have $17,500 in cash expenses over the
next 11 months during his projected loan period.

Calculate the estimated interest Kyle will expect to pay over the course of this loan – show work.

*($17500/2) x (.08/12) x 11 x .4 = x *

$8750 x .0067 x 11 x .4 = $257.95 ($256.66 no rounding)

**Part 2 – Loan Analysis **

**Option 1 – Low interest loan on a high principal amount **

Justin can buy some feeder livestock and raise them to earn cash before the rest of the products are ready for sale. To do this he needs a bigger loan. The good news is that a bigger loan fetches a lower interest rate. Here are the numbers:

Interest rate 4.5%

Loan duration is for 8 months

Estimated cash expenses are $39,800

Justin will need to finance 70% of the cash expenses
*(39800/2) x (.045/12) x 8 months x .7 = x *

19900 x .00375 x 8 x .7 = $417.90 of interest cost over 8 months

**Option 2 – Justin could opt not to purchase the feeder livestock and go with his **
current business plan. His interest rate goes up for a lower principal loan so he is

Justin will need to finance 50% of the cash expenses
*(20000/2) x (.068/12) x 8 months x .5 = x *

10000 x .00567 x 8 x .5 = $226.66 of interest costs over 8 months

Which option has the lowest interest cost?

Option 2 is best.

What other information is needed to decide between option 1 or option 2?

1) Expected profit and 2) net cash flow from the alternative business plan

**Activity 3 – Case Study: Part 2 **

This activity is an extension of part 1 presented in Lesson 1. The following is the solution.

**Annual Cash Flow Budget **
**Sources of cash **

Beginning cash balance $500.00

Crop sales

Livestock sales $693.00

Custom work

Sale of depreciable assets Sale of land

Proceeds from planned borrowing—cow note $250.00 Proceeds from planned borrowing—operating note $309.60 Other sources of cash

**Total sources of cash ** $1,752.60 (A)
**Uses of cash **

Cash expenses (excluding interest paid) $309.60

Breeding stock purchases $750.00

Purchase of other depreciable assets Purchases of land

Principal payments $ 79.00

Interest payments on long-term debt $ 12.50

Operating note repayment $309.60

Interest on operating note $ 7.74

Other uses of cash

**Total uses of cash ** $1,468.44 (B)
**Net cash surplus of deficit ** $ 284.16 (A-B)

**Explanation: **

First, enter sources of cash. Enter the cash revenue from the sale of the calf. Enter the proceeds from the loan to purchase the bred cow and the proceeds from the operating note. The only other source of cash is Megan’s beginning cash balance of

$500.

Next, enter uses of cash. Enter the cash expenses (feed and veterinary). The full purchase price of the bred cow is entered. The principal payment and interest on the cow note are entered. The operating note will be repaid when the calf is sold. Then, estimate the interest on the operating note as ($309.60 ⁄ 2) × 0.05= $7.74.

While Megan’s project appears to have positive cash flow for the first year, if she needed to improve cash flow, she might be able to reduce the heifer’s feed costs.

She might be able to “roll” part of her operating note balance forward into the next year—if she anticipates more cash flow in the coming year. Since she should sell two calves in the coming year, this is a possibility. However, this is not

recommended as a standard practice. Carry-over of an operating loan is often the first sign of growing financial stress in a commercial operation. If circumstances are not expected to improve dramatically in the following year, operators can find themselves accumulating debt loads from which they may not be able to recover.