Make Informed Decisions with Annual Cash Flow Statements
October 15, 2019
Running a farm business is demanding. Time in the office can be crucial to your success, especially in these challenging economic times. A thoughtfully created annual cash flow statement helps you understand your business’ financial standing and can provide the clarity needed to make informed decisions throughout the year.
When creating an annual cash flow statement, include projections for cash inflows and outflows for both farm and non-farm activities. Combining business and personal finances brings all expenses to the forefront, creating an avenue for crucial budgeting conversations.
Key components of a cash flow include:
- Crop sales from projected production: include estimated yields using your 10-year APH and projected price adjusted for local basis from sources such as farmdoc.
- Tenured farm businesses have access to production history, but many beginning farmers do not. Reference farmdoc for average farm budgets for your specific region of the state and type of ground, which can provide a baseline benchmark.
- Livestock and – when planned – machinery, or other capital sales
- Recurring agricultural program payment like CRP
- Other income from custom work, service, or cash rent received
- Income from off-farm employment
- Operating costs including seed and feed, fertilizer and lime, chemicals, fuel, drying and storage costs, custom hired work and payroll, seasonal machinery rental and maintenance, or veterinary and breeding bills
- Do not include pre-paid inputs, as your cash flow projections should match income and expenses to the upcoming year’s crop. When done, compare your numbers to historical or benchmark data – does it paint a realistic picture?
- Fixed payments including cash rent, equipment leases, and insurance premiums
- Principal and interest debt service payments
- Any planned capital investments
- Taxes, family living, and other off-farm expenses
While time consuming, creating cash flow projections at year-end provides a realistic view of the upcoming year and can be used as an ongoing tool when adjustments need to be made.
For example, in 2019 when it became known yields would vary widely, the inflow section became inaccurate. Adjusting yields to updated expectations would have shown you to alter planned inputs to maintain working capital or minimize the impact on your bottom line.
Prices also vary throughout the year. Updating the projected price in your cash flow as you make sales or as budget projections are modified, gives you a more accurate understanding of your financial position.