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CASH FLOW STATEMENT

     We have discussed the Statement of Cash Flows (which reports a firms or operations major sources of cash receipts and major uses of cash payments for given period of time) and now we need to look at the cash flow statement.

     A cash flow budget is a projection of your business’s cash inflows and outflows over a certain period of time.  A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis.  However, a cash flow budget could predict the cash inflows and outflows on a weekly or a daily basis.  Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile.  At the same time, a cash flow budget that doesn’t look far enough into the future will not predict future events early enough to us to take corrective action in the cash flow itself.  Generally these are done at the beginning of the crop year and they are for a one year period of time. 

     This is an intricate part of the annual budget and budget paperwork.  This can possibly be the most frustrating but yet it is vitally important.  This portion has to do with our budget for the upcoming year.  Budgets are mainstay of controlling cost and profitability during a production plan.  It does not matter how simple the process to complete or how difficult, it is imperative that it be accomplished.  All budgets, irrespective of the area being managed, are constructed upon historical data and are the basis for our future budget based upon actual or best attainable results to the most likely.  Somewhere in between completing a product one time, on schedule, as for as a unit price and time allocated.  Individual budgets are reviewed and combined into a dynamic budget variance reporting system for monitoring and feed back.  Generally whenever we pick up a package of papers from our lending institution whether it be the local FSA office or our banks, or the PCA office. They will require us to do a budget or cash flow page.  This is where your paperwork should actually begin.  The amount of money that is going to be spent to produce the crop is going to have to be decided so that every one looking at the projected income will be aware of how it is going to be generated.  The left-hand side of the budget will generally have a list or types of expenses.  The columns across will then designate which month those expenses are going to be incurred and the far right hand side will reflect the totals, with the amount at the bottom generally being the amount of the loan request itself.  This is a vital part of the loan application.  The income portion is sometimes located on the top portion of this same page so that all this gathered data could be digested in relative little effort.  Generally, when we are preparing our package for the next year, the past page that we have is a good source to look at.  If the operation has not changed a great deal and there has been no additions or deletions in our operation we can continue to use the format that we used last year and make corrections to it.  Each and every operation will be completely different but the basis for each will be the same.

 

     Financial measures are not a substitute for informed judgment.  Financial measures are simply a convenient way to evaluate large amounts of financial information and enable the user to compare the financial position and financial performance of an individual firm over time and to compare one to the other firms within an industry.  Whenever we look at our operation and the lenders are looking at it closely, the following financial measures are recommended for use by the agricultural producers, agri-businesses and the financial institutions. 

 

     These financial measures adequately measure financial position and financial performance.  Explanations of individual measures are presented to aid in understanding the use and the limitations of the measures.  All financial measures need not be calculated for every situation – the situation may not call for all the financial measures and the accounting information may not be available to calculate all each time.  Finally, this list of financial measures is not exhaustive and the use may calculate additional measures if the information is accurate and the ratios provide more insight.

 

LIQUIDITY:

 

1.                   Current ratio

2.                   Working capital

 

SOLVENCY:

 

3.                   Debt/Asset ratio

4.                   Equity/Asset ratio

5.                   Debt/Equity ratio

 

PROFITABILITY:

 

6.                   Rate of return on farm assets

7.                   Rate of return on Farm equity

8.                   Operating Profit margin ratio

9.                   Net Farm Income

 

REPAYMENT CAPACITY:

 

10.               Term Debt and capital lease coverage ratio

11.               Capital Replacement and term debt repayment margin

 

FINANCIAL EFFICIENCY:

 

12.               Asset turnover ratio

13.               Operation Ratios

a.      operating expense ratio

b.      depreciation expense ratio

c.       interest expense ratio

d.       net farm income from operation ratio

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