Short-term decisions, such as whether the business can survive the next year, are answered by examining whether the business can cover its operating (or variable) costs for that period of time. Operating (variable) costs are items such as feed, fingerlings, and utility costs, but do not include costs such as depreciation or interest payments. An enterprise budget can be used to answer this question. On an enterprise budget, the farmer must look to see whether the total gross receipts (revenue) expected over the next year will be greater than the expected operating costs. On most enterprise budgets, a line item called “income above variable costs” makes this comparison. If the income above variable costs is positive, then the farm can continue to operate over the next year and will be able to pay some of its fixed costs. However, if the income above variable costs is negative, the farm will lose more money by continuing to operate that year. Another way to look at this question from the enterprise budget is to examine the break-even price above variable costs (not total costs). If the break-even price above variable costs is greater than the expected price of fish to be sold, the business will lose more money by operating than by shutting down. Survival in the short run also requires adequate liquidity and cash flow. Adequate liquidity means that enough cash is available to make all payments when due. Liquidity is determined from the balance sheet and cash flow is determined from the cash flow budget. On the balance sheet, a financial ratio known as the current ratio measures liquidity. A current ratio that is less than 1 indicates a liquidity problem for the business. Cash flow budgets project monthly cash revenue and expenses for the year. Any month with a negative cash flow represents a cash flow problem that needs to be resolved because expenses exceed receipts for that month. A production and financial plan that resolves the cash flow deficit and generates the revenue when needed must be developed and implemented to be able to operate that year.
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