Understanding Cash Flow
What is a Statement of Cash Flow?
A Statement of Cash Flows helps you understand the flow of cash in and out of your farm business. A Statement of Cash Flows can be measured on an annual, quarterly, or monthly basis. A “pro forma cash flow,” often called an annual budget or cash-flow projection, predicts inflows and outflows of cash in the future. This can be helpful to farmers looking to better understand the finances of their farm businesses.
What does Cash Flow measure?
- Cash flowing in
- Cash flowing out
- Cash to be invested back in the farm
What does Cash Flow tell you?
Cash Flow tells you when:
- You will have money
- You will have shortages
- You will need to save or borrow
Why figure out your Cash Flow?
- To better understand your business
- Removes stress and uncertainty
- A decision-making tool
- A planning tool
- If there is enough cash in case of an unexpected event or emergency
What’s included in a Cash Flow Statement?
- Beginning Cash on Hand
- Non-Farm Income
- Family living costs
- Planned capital investments
- Planned borrowing
- Payments on existing debt
- Farm Income
- Operating Expenses
When do you use a Cash Flow Statement?
- Before you start farming – “Should I start farming?”
- Each year and update during the year – “What will it take to get through the year?”
- To manage for profitability
- When considering:
- Buying equipment
- Hiring new labor
- Adding new crops, a new lease, or a new enterprise
In order for a farm business to be sustainable and achieve profitability, it needs positive cash flow in the short- and long run.