Cash Flow Documents
Know Your Numbers, Know Your Options
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06/18/2020
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By Jessica Groskopf
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- [00:00:00.239](upbeat music)
- [00:00:07.000]Hi everybody,
- [00:00:07.833]I'm Jessica with Nebraska Extension and today
- [00:00:10.810]we are going to be talking about
- [00:00:12.920]our next financial document, which are cash flow documents,
- [00:00:16.760]including cash flow budgets, and cash flow statements.
- [00:00:20.480]As a farmer or rancher you probably don't have
- [00:00:22.950]a steady stream of cash coming into your business.
- [00:00:26.050]It is likely that you receive cash in large lump sums
- [00:00:29.120]a couple of times a year, but must pay expenses year round.
- [00:00:32.930]The seasonal nature of farming and ranching requires you
- [00:00:36.020]to manage your cash flow carefully.
- [00:00:38.310]Cash is the lifeblood of your business.
- [00:00:41.230]Without cash a farmer ranch will not survive.
- [00:00:45.420]Cash flow budgets and cash flow statements,
- [00:00:47.950]help plan and track cash income and expenses.
- [00:00:51.650]Cash flow documents map out when
- [00:00:53.720]and how cash is earned and expenses are paid.
- [00:00:56.700]These documents are useful to determining operating note
- [00:01:00.180]or line of credit needs.
- [00:01:01.910]Cash flow documents do not measure profitability.
- [00:01:05.930]There are two types of cash flow documents,
- [00:01:08.500]budgets and statements.
- [00:01:10.450]A cash flow budget is a planning document,
- [00:01:12.750]a cash flow statement is a record of actual cash flow.
- [00:01:17.070]Computer software like Excel or other accounting programs,
- [00:01:20.570]make it easy to develop cash flow documents
- [00:01:23.530]and monitor actual spending.
- [00:01:25.650]Let's take a deeper look into each type
- [00:01:27.800]of cash flow document.
- [00:01:29.290]The first cash flow document we are going to look at
- [00:01:32.190]is a cash flow budget.
- [00:01:34.100]Cash flow budgets are whole-farm spending plan
- [00:01:36.910]that project cash income and expenses.
- [00:01:39.840]Cash inflows and outflows are estimated
- [00:01:42.090]for each time period, usually monthly,
- [00:01:45.290]but sometimes annually.
- [00:01:47.870]Cash flow budgets are usually required
- [00:01:49.790]to obtain an operating loan.
- [00:01:51.730]Banks use cash flow budgets to determine how much money
- [00:01:54.820]is needed for an operating line of credit.
- [00:01:57.440]Your loan officer will look for the month
- [00:01:59.510]or quarter that runs the largest cash deficit.
- [00:02:02.780]Your loan amount should be slightly larger
- [00:02:05.010]than the amount projected by your cash flow budget.
- [00:02:10.030]Most farmers or ranchers project cash flows
- [00:02:12.440]on a monthly basis for the upcoming production year.
- [00:02:15.700]Let's look at a simple monthly cash flow budget.
- [00:02:20.050]To start a cash flow budget
- [00:02:21.410]begin with your actual beginning cash balance,
- [00:02:23.760]and then estimate the cash inflows and outflows
- [00:02:26.450]for each month.
- [00:02:28.450]In January, this farmer had
- [00:02:30.130]a projected cash surplus of $85,000.
- [00:02:33.480]If you do not have an operating note,
- [00:02:35.380]cash surplus is added to the ending cash balance.
- [00:02:38.840]If you have an operating note,
- [00:02:40.370]this cash surplus is used to pay down
- [00:02:42.510]the balance of your loan.
- [00:02:44.180]The ending cash balance and ending loan balance
- [00:02:46.690]are carried forward as the beginning cash
- [00:02:48.730]and loan balances for the next month.
- [00:02:53.600]In February, this farmer has a projected cash deficit.
- [00:02:57.350]Therefore they will have to borrow money
- [00:02:59.320]from their operating loan.
- [00:03:01.220]This process is repeated month by month for an entire year.
- [00:03:09.100]If you are developing a cash flow budget for your banker,
- [00:03:11.800]they will want a lot more detail than what is provided
- [00:03:14.460]in this example.
- [00:03:15.810]They will need to know how much you're expecting
- [00:03:17.720]to produce over the coming year,
- [00:03:19.600]how much you plan to spend
- [00:03:21.060]and how much you plan to sell it for.
- [00:03:23.120]The obvious expenses to include are seed,
- [00:03:25.840]fertilizer, rent and repairs,
- [00:03:28.100]but don't forget to include accounts receivable,
- [00:03:30.470]accounts payable and overhead expenses such as labor,
- [00:03:34.020]utilities and insurance.
- [00:03:36.360]Another expense that should be included
- [00:03:38.260]are family living expenses or personal wages
- [00:03:41.170]that are extracted from the business.
- [00:03:43.300]Do you withdraw these funds throughout the year
- [00:03:45.480]or in one lump sum?
- [00:03:47.140]These details should be included in your cash flow budget.
- [00:03:52.150]Creating a cash flow for a farmer ranch
- [00:03:54.280]that is already in operation can be easy.
- [00:03:56.860]Rather than recreating the wheel,
- [00:03:58.440]review the bank and credit card statements
- [00:04:00.350]for your operation from the previous year.
- [00:04:02.920]These statements will give you a solid foundation
- [00:04:05.110]to build off of.
- [00:04:06.350]They will show you anticipated times
- [00:04:08.440]when cash will come in and go out.
- [00:04:11.190]You can then just make simple adjustments
- [00:04:13.370]based on the current year's prices and expenses.
- [00:04:16.880]If you're developing a cash flow budget
- [00:04:18.720]for the first time, enterprise budgets like those developed
- [00:04:22.020]by the University of Nebraska, Lincoln may be helpful.
- [00:04:25.530]They can help you estimate realistic costs.
- [00:04:28.400]You can then work with your banker to develop
- [00:04:30.330]the timing of purchases and sales,
- [00:04:32.300]as well as the prices you expect to sell your goods for.
- [00:04:36.720]Once you have a cash flow budget complete
- [00:04:38.670]track your actual income and expenses against your budget.
- [00:04:42.890]This will allow you to make adjustments
- [00:04:44.750]to your budget throughout the year.
- [00:04:47.070]By tracking your actual cash flow,
- [00:04:48.960]you are on your way to creating a cash flow statement.
- [00:04:52.850]A cash flow statement is a record of actual cash flow.
- [00:04:56.330]Cash flow statements are historical financial document
- [00:04:59.130]that keeps track of all the money that went in
- [00:05:01.270]and out of the business.
- [00:05:03.050]Cash flow statements divide expenses by operating,
- [00:05:06.290]investing, and financing activities.
- [00:05:08.930]Let's look at a cash flow statement.
- [00:05:13.170]A cash flow statement accounts for all the cash
- [00:05:15.530]used over a time period, usually a year.
- [00:05:18.550]Rather than organizing income and expenses by date
- [00:05:21.520]like a cash flow budget, cash flow statements,
- [00:05:24.270]divide income and expenses by the type of activity
- [00:05:26.930]the cash was used for.
- [00:05:28.720]The three types of activities are operating,
- [00:05:31.090]investing, and financing.
- [00:05:35.360]Most income and expenses for a farmer ranch
- [00:05:37.920]are reported in operating activities.
- [00:05:40.530]This includes feed, veterinarian bills and cattle sales.
- [00:05:46.080]Investing activities are capital sales and purchases.
- [00:05:49.700]Capital goods are machinery, equipment, land, buildings,
- [00:05:53.670]and other long-term and intermediate assets.
- [00:05:57.900]Financing activities accounts for the money borrowed,
- [00:06:00.510]principal paid and income taxes paid.
- [00:06:03.510]If the farm or ranch relies on non-farm income
- [00:06:06.960]or pays family living expenses or wages,
- [00:06:09.820]they're also reported in financing activities.
- [00:06:14.140]By dividing actual cash income and expenses into operating,
- [00:06:17.730]investing, and financing activities,
- [00:06:20.090]we are better able to analyze how cash
- [00:06:22.390]was used within the business.
- [00:06:24.370]Cash flow statements help us to determine three things.
- [00:06:27.570]First, is the operation successful in generating net cash?
- [00:06:31.860]Second, what are the trends in net cash provided
- [00:06:35.110]by each type of activity?
- [00:06:36.890]And finally, what are the major reasons for a positive
- [00:06:40.470]or negative cash provided by each type of activity?
- [00:06:44.740]When viewing a cash flow statement,
- [00:06:46.720]operating activities can be positive or negative.
- [00:06:50.080]Operating activities can vary widely from year to year.
- [00:06:53.960]The most obvious factors that influences variability
- [00:06:56.960]are the differences in prices and production.
- [00:06:59.590]However, other factors such as prepaying expenses,
- [00:07:02.970]holding grain to sell till next year or deferring payments
- [00:07:05.890]between years can also impact operating activities.
- [00:07:10.370]Investing activities are usually negative
- [00:07:12.590]for most farms and ranches.
- [00:07:14.390]Producers typically like to buy intermediate
- [00:07:16.850]and long-term assets more than they'd like to sell them.
- [00:07:21.070]Seeing how cash is utilized in the financing category
- [00:07:24.120]can be very eyeopening for many operations.
- [00:07:27.290]For some farmers and ranchers cash flow statements
- [00:07:30.080]show that financing is providing most of the cash
- [00:07:33.250]for their business rather than operating activities.
- [00:07:36.970]Financing activities depend heavily
- [00:07:39.290]on the structure of the operation.
- [00:07:41.590]Family living expenses or wages,
- [00:07:43.690]and non-farm income play a big role
- [00:07:46.350]in if financing activities are positive or negative.
- [00:07:50.600]Looking at a single cash flow statement might not give you
- [00:07:53.500]a complete picture of how cash
- [00:07:55.120]is used in your farm or ranch.
- [00:07:57.440]You will want to look at multiple years
- [00:07:59.270]of cash flow statements to determine the trends
- [00:08:02.010]in operating, investing, and financing activities.
- [00:08:05.910]Over a few years, you want to have generated enough cash
- [00:08:09.440]by operating activities to cover the expenses generated
- [00:08:13.110]by investing and financing activities.
- [00:08:18.360]Cash flow statements are related to the balance sheet
- [00:08:20.920]and income statements.
- [00:08:22.410]A cash flow statement shows how
- [00:08:24.370]cash was used between two balance sheets,
- [00:08:26.520]usually a year apart.
- [00:08:28.470]The beginning cash balance is reported
- [00:08:30.330]on the first balance sheet
- [00:08:34.940]and the ending cash balance should be equal
- [00:08:37.070]to the cash reported on the second balance sheet.
- [00:08:42.800]Assets purchased or sold are reported
- [00:08:45.060]in the investing activities on the cash flow statement
- [00:08:47.800]and are reflected in the ending balance sheet
- [00:08:50.140]by changes in asset values.
- [00:08:52.750]Cash income and expenses are also reported
- [00:08:55.490]on the income statement.
- [00:08:57.470]Cash is the lifeblood of the business.
- [00:08:59.760]Without cash a farm or ranch will not survive.
- [00:09:03.120]Cash flow statements and cash flow budgets
- [00:09:05.410]are an important part of managing your operation.
- [00:09:09.110]Computer software like Excel or other accounting programs
- [00:09:12.710]make it easy to develop cash flow documents
- [00:09:15.160]and monitor actual spending.
- [00:09:17.380]It is important to note that cash flow documents
- [00:09:19.780]do not measure profitability.
- [00:09:21.860]A positive cash flow does not equal a profitable business.
- [00:09:25.930]Cash flows do not match income and expenses using accrual
- [00:09:29.530]or accrual adjusted accounting methods.
- [00:09:32.080]Furthermore, cash flow documents do not account
- [00:09:34.710]for non-cash expenses, such as depreciation.
- [00:09:37.930]To learn more about measuring profit,
- [00:09:40.030]check out our next video on income statements.
- [00:09:42.881](upbeat music)
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