Farm Financial Analysis Series: Cash Flow Statement

Financial statements are essential tools for managing farm businesses. Often, an accountant or bookkeeper will produce statements from the financial records of the business. Although the manager or owner may not be the person who develops the statements, they should understand the information that the statements provide about the financial condition of the business and be familiar with actions they can take to improve poor financial performance.

To ensure that you get a full picture of the farm’s financial situation, use this publication in combination with the other financial analysis tools found in the Farm Financial Analysis Series. This series includes P3709 Managing Farm Finances in Turbulent Times, P3713 Balance Sheet, P3707 Income Statement, and P3712 Ratios to Measure Farm Financial Health.

A cash flow statement is a record of all the cash inflows and outflows that occur throughout the accounting period. This allows you to see how your available cash varies across the year. This is important for understanding when financial obligations are due throughout the year, and how to properly prepare for these periods going forward.

Creating a Cash Flow Statement

The cash flow statement can be used to record monthly cash flows (see Figure 1), or it can be done bi-monthly, quarterly, or semiannually. However, the more detailed the cash flow statement is, the easier it is to understand when cash is going in and out of the business. The following items outline what items to include in a comprehensive cash flow statement.

Cash from Operating Activities

The cash from operating activities section includes the receipts from any sales of crops or market livestock. Other operating income would include amounts from ag program payments like the Agricultural Risk Coverage (ARC) or Price Loss Coverage (PLC) programs. This could also be payment for any custom work that you did.

Also include all expenses for operating activities—any money spent on feed or any items that are intended to be resold, such as feeder livestock. This section also includes the operating expenses, which are expenses that are used to help the farm run. Operating expenses include money spent on labor, chemicals, fertilizers, fuel, seed, or marketing expenses. Interest expense is also included and is the interest paid on any loans. Lastly, any income taxes paid should be recorded here.

The net cash income from operating activities is all the incoming cash from sales or other operating income minus all the costs that it takes to run the farm. The cash flow shows the parts of the year incoming cash is going to be higher than expenses, and the parts of the year where the incoming cash may be lower.

Cash from Investing Activities

This section is about cash earned or spent on investment items. Any item that is typically used for longer than 1 year is considered an investment item, including any sales or purchases of breeding livestock. Any purchases or sales of any equipment or real estate are also included. The net cash from investing activities is the cash earned from investment items minus the cash spent on investment items.

Cash from Financing Activities

The cash provided by financing activities comes from any cash received from operating loans or term debt financing. Any nonfarm income that is used to pay for farm expenses is also included. Lastly, any gifts or inheritance is included, along with any investment income, sales of personal assets, and retirement account withdrawals.

Record the cash used to pay for any financing debt in this section. This is any payment on the principal of term debt, finance leases, and operating and CCC loans. Record any owner withdrawals for unpaid management and labor, as well.

Cash Flow Summary

The cash flow summary shows all the cash received from operating, investing, and financing minus all the cash expenses for each month. The beginning cash balance is the amount of cash available at the beginning of each month. The ending cash balance takes the beginning cash balance and adds the given month’s net cash income from operating activities, net cash from investing activities, and net cash from financing activities. The net change in cash shows which months have the most cash going in or out of the farm business.

Figure 1. Cash Flow Statement Example.

How Can a Cash Flow Statement Help You?

A cash flow statement is a valuable tool for understanding when loan payments need to be made and when additional borrowing will be necessary throughout the year. The cash flow can be used to establish a loan repayment schedule that will coincide with when revenue is coming into the farm business. This is important for the farmer as well as the lender. This financial tool also helps you understand when and if an investment can be made during the year.

You can use information from the cash flow statement to determine liquidity problems. If the cash inflows are not enough to cover the business expenses and the operating loan is higher at the end of the time period than it was at the beginning, there is a liquidity problem. You can use the cash flow statement to determine which expenses can be adjusted to reduce this liquidity issue. Used in combination with the balance sheet and income statement, the cash flow statement can be a useful way of determining a farm’s financial situation.

Publication 3710 (POD-09-21)

By Brian Mills, PhD, Assistant Professor, Delta Research and Extension Center; Kevin Kim, PhD, Assistant Professor, Agricultural Economics; and Jeff Johnson, PhD, Extension/Research Professor (retired), Agricultural Economics.