Question

How might a poorly designed cash-flow budget increase the cost of farm debt?

Answer 1

cash budget is an estimation of the cash inflows and outflows for a business over a specific period of time. This budget is used to assess whether the entity has sufficient cash to operate. Companies use sales and production forecasts to create a cash budget, along with assumptions about necessary spending and accounts receivable. If a company does not have enough liquidity to operate, it must raise more capital by issuing stock or by taking on debt.

It creates a danger of theft.

You must have plenty of documentation that tracks your cash movements to protect yourself against theft. Cash is the easiest asset to steal, partially because it is not very easy to trace. Although you don’t need to list every serial number of every bill you send outside of your home or business, it is helpful to sign-out specific amounts when the cash must travel to a new location. That will give you a paper trail that can be used to potentially make an insurance claim should something happen.

2. It limits your spending power.

Many businesses today have stopped accepting cash for certain activities. You may find it to be impossible to rent a car without having at least a debit card available to access your cash resources. Some hotels will not accept a reservation without a debit or credit card number. If you switch to a cash-only budget, you may find it difficult to access some of the services your home or business may require. That, in turn, limits your overall productivity.

3. It limits where you spend your money.

If you show up at a store to purchase something in cash, most will accept the transaction without a second thought. If you want to make that purchase online, however, cash is not going to be a suitable option. Most, but not all, geographic locations have eliminated the cash on-delivery (COD) process, requiring payment up-front for products or services. Trying to process a cash payment on an e-commerce website is almost impossible to do.

4. It can be easy to lose.

If you carry cash on you, there is a chance you could inadvertently misplace it. That means you no longer have access to it until it is found. That is why having some level of card protection, even if it is a debit card, offers a small advantage. If you lose your debit card, you can call your bank and have the number frozen until the card is found, or the institution sends you a new one. Lose your cash and you’ve lost your money.

5. It limits your ability to build a credit profile.

Cash budgets may limit the amount of debt that you create for yourself. That is advantageous in saving money. It also means that your ability to purchase big ticket items will be restricted. You’ll need to save up enough money to purchase a vehicle instead of financing the transaction. You’d be forced to save up the cash to purchase a property or home outright instead of being able to use a mortgage. In the long run, you pay less with cash because you avoid interest. In the short-term, however, you are limiting your options.

6. It eliminates rewards.

Credit card rewards might seem like a trap to some. When used wisely, they can extend the power of your finances. Imagine if your credit card gives you a 3% cash back reward on purchases you already make. Pay with the credit card, earn the cash back, then pay off the balance each month with the cash you’d have spent anyway. Just like that, you’ve increased your spending power by 3%. If you use a cash-only budget, this benefit is not accessible.

7. It is not always a reflection of profit.

Within a cash budget, it is easy to mistake an inflow of cash as profit. That is not always the case. Inflows might occur because of a security deposit being paid. The sale of a capital asset creates a cash inflow as well. One-off activities and non-sustainable events create cash inflows as well. If these are mistakenly classified as profits, then the estimates being made on actual profits are flawed and may create unpleasant surprises down the road.

8. It relies on estimates to meet future needs.

When using a cash budget, the inflows and outflows from the previous year are used to allocate cash for line items in the next year. That means each annual budget is an estimate, based on the previous results generated. There is no guarantee that cash flows will be similar year-by-year for any budget. At the same time, non-financial issues may influence your cash flow, which may negate certain values that may generate cash in the future.

9. It forces cost to be the primary factor in making decisions.

Let’s say there is a product priced at $2.50 and you like to purchase it at this store across town because the customer service is better. You could purchase it for $2 at a closer store, but the service there is terrible. Using a cash budget, you’re forced to go with the latter because that is where you save money. Cost becomes a primary factor in making each decision.

These cash budget advantages and disadvantages are good to consider if you’re struggling with debt right now. Spending with cash limits new debt, though it also limits certain opportunities. It creates discipline within personal spending habits, encouraging an exploration for new efficiencies. It may not be the best approach for everyone, especially businesses seeking immediate growth, but the advantages always make it worth a second look.