Understanding the Farm Cash Flow Projection
As a farmer, managing your cash flow is crucial to the survival and success of your farm. Cash flow projections predict cash inflows and outflows, as well as identify potential financial obstacles that may arise. While the balance sheet and income statement are concerned with how a farm performed in the past, cash flow projections help predict how a farm will perform in the future. This is important in a loan analysis as it can help establish future debt repayment capacity and predict operating line needs during the year. It gives a lender insight on when to expect draws on the line and when to expect it to be paid off. It is helpful to complete a monthly or quarterly cash flow projection.
A cash flow projection differs from an income statement because cash flow projections are only made on a cash basis (compared to accrual). They are only concerned with the inflows and outflows of cash during a period, regardless of when the income or expenses occurred. Understanding how to prepare a cash flow projection can help you make informed decisions about investments, expenses, and financing.
It includes three main components, 1) cash inflows, 2) cash outflows, and 3) operating financing activities.
Components of the Farm Cash Flow Projection
Cash Inflows
The first step in creating a farm cash flow projection is understanding what cash inflows will occur during the proposed period. This will be all projected income sources – crop sales, livestock sales, and government payments. You should also consider any other forms of income for your farm, such as rental income or profits from land sales. The cash inflows need to be payments you expect during the year – not contracts to be paid out later.
Cash Outflows
Establishing expected cash outflows will rely on historic expense records. They will provide a baseline for project expenses. This is why keeping a detailed and accurate record of every expense your farm incurs is essential. This includes input costs like seed, fertilizer, and equipment maintenance. Other expenses include wages, utilities, rent, and interest payments on loans and leases.
Operating Financing Activities
Once you’ve established cash inflows and outflows, you will have a pretty good idea of the times of the year your cash flow will be insufficient. This is where you will rely on an operating loan. The operating financing activities section of the cash flow projection helps your lender determine the appropriate amount for your operating line during each quarter or month projected. A lender uses this simple formula to project when a farmer may need to rely on an operating line.
Beginning cash balance + cash inflows – cash outflows = ending cash balance
A deficit on the ending cash balance would indicate that an operating line balance would be needed to cover the deficit. On a farm, this generally occurs early in the growing season when a farm has incurred expenses but has not yet harvested the crop.
