Cash flow plans allow producers to continue operating when profits narrow
“Cash flow looks at cash in and cash out of the business,” says Robin Reid, Kansas State University Agricultural Economist. “This can be confused with an income statement, which evaluates the profitability of an operation.”
In an income statement, non-cash expenses are also captured to get a full picture of an operation’s profitability, but Reid says cash flow addresses feasibility and answers questions like the ability to pay bills or purchase inputs on the ranch.
With many different ways to structure a cash flow, Reid says the purpose is to outline where cash comes in and out of the business throughout the year, month-by-month. Projected cash flows should be regularly compared to actual values to plan for the remainder of the year.
“If we have a $20,000 repair on a tractor, we are better able to address this expense if we have an outline of our cash flow throughout the entire year,” she says.
Building cash flow
“Cash flows are fairly simple statements,” Reid explains.
Inflows include sales from the farm, ag program or crop insurance payments, capital sales – such as proceeds from equipment or land sales, loan proceeds and more. Off-farm income should also be included.
“We don’t always think about off-farm income in a cash flow,” she says. “If off-farm income and family living will affect the farm’s cash flow, it’s important to put the two things together on our cash flow statement.”
While the off-farm income can – and should – be separated to look at the health of the farm, the income should also be included for accurate cash flow analysis.
Reid explains, “Outputs include seed, feed, fertilizer and other inputs, capital asset purchases, new equipment and more can be outlined to make sure we have the cash flow. Family living, taxes and loan payments should also be included.”
“The difference between total inflow and total outflow is the net cash flow,” she adds. “This is the bottom line number we’re trying to get to.”
What it means
Because cash flow is not necessarily a measure of profitability, negative cash flow can occur.
“In a case farm that I use, a farmer purchased a $100,000 piece of equipment and financed $80,000 of it. In this example, $20,000 cash was used to invest,” Reid says. “The annual total is in the red, but they were profitable.”
She cautions, however, “The reverse can also be true. We can have a positive cash flow and still not be profitable.”
As an example, if a farmer holds grain over from 2018, then sells that grain in 2019, along with 2019’s production, the result is more sales than expenses in the current year, resulting in a positive cash flow.
When making cash flow projections, Reid encourages farmers and ranchers to look at their cash flow month-to-month.
If cash shortfalls are projected, Reid says small things can be done to address potential problems.
“The first steps are knowing that a problem might occur in a specific month, know how much that shortage might be and realize there are many little things that can happen in that situation,” she says.
Family living can be difficult, but items in family living or the timing of those purchases can be changed to compensate for cash shortfalls. As an example, vacations should be timed during times that are flush with cash not lean.
“We also may be able to arrange investments for times that we see positive cash flow,” Reid explains.
The full picture
While cash flow statements are valuable decision-making tools, Reid adds, “It’s very important, when we’re looking at any financial statement, that we look at the other statements, as well, to really get a whole picture of our business.”
Balance statements, net worth and income statements should be coupled with cash flows and enterprise budgets can help farmers or ranchers to make decisions and prepare for the coming year on their operation.
Saige Albert, managing editor of the Wyoming Livestock Roundup, summarized Reid’s comments from the Feb. 15 edition of “Agriculture Today,” a radio show from Kansas State Research and Extension. Send comments on this article to firstname.lastname@example.org.