Using a cash flow to your advantage
February 7, 2014
Every banker wants a cash flow for the files when a farmer/rancher renews notes for the year. This is more than just some paperwork to satisfy your lender; this can be a valuable tool for the operator. Cash flows can help with management decisions for the year.
A cash flow summary is the actual result of money transactions during the year. It shows all cash income and expenses throughout the year. A farmer can see by looking at the cash flow summary what months had very little income or very little expense. By knowing how the money is moving through the business, better management decisions can be made. How you may ask? By taking the knowledge of the previous year, a producer can make a cash flow projection to plan for the next year.
What is the point of doing the extra work of making a cash flow projection and why do banks make you complete such a task? Cash flow projections can tell a farmer/rancher the line of credit will be large enough to cover the maximum projected expenses month by month. No, not all expenses can be foreseen, but with a projection based on past experiences of your revenue/expense timing, the unexpected may be a little easier to handle. A projected cash flow can also help plan for purchases. By laying out the year's money projection, the operation will be able to estimate when the best time to make a large purchase will be, adjust the sales of commodities to cover a new purchase, or decide a new purchase is not affordable. Another financial management bonus is to see what your relationship is between short-term debt and repayment capacity. If short-term debt is too high for repayment capacity, the operation will have a difficult time meeting their debt obligations and, sometimes, will have to find another income stream to help pay down the debt. By having a cash flow projection and summary, a farmer can do a quick checkup throughout the year to see how the actual performance of the operation is doing. Bankers understand the importance of cash flows, but sometimes operators just see them as more paperwork. As long as a cash flow has to be completed, take advantage of the information and use it as a management tool.
If any producer would like more information on cash flows or record management, the SD Center of Farm and Ranch Management can help. To contact the SDCFRM office or any of our instructors, call 1-800-684-1969 or email us at email@example.com.