EC-616 (2024)

EC-616

Purdue University

Cooperative Extension Service

West Lafayette, IN 47907

A projected cash flow statement is used to evaluate cash inflows andoutflows to deter. mine when, how much, and for how long cashdeficits or surpluses will exist for a farm business during anupcoming time period. That information can then be used to justifyloan requests, determine repayment schedules, and plan for short-terminvestments. This publication focuses on preparing and using a projected cash flow statement in managing the farm business.

A projected cash flow statement is best defined as a listing ofexpected cash inflows and outflows for an upcoming period (usually ayear). Anticipated cash transactions are entered for the subperiodthey are expected to occur. The length of the subperiod depends uponwhether a monthly or quarterly cash flow statement is used. The wordcash is crucial in this definition, because only cash items areincluded in a cash flow statement.

Cash inflows include cash operating and capital receipts and caninclude nonfarm as well as farm revenues. Cash outflows usuallyinclude such things as farm operating and capital outlays, familyliving expenses, and loan payments. However, if the farming operationis completely separate from the family, living expenses would not beincluded in the cash flow statement for the farming operation. Anexample of such an arrangement would be a farm that is incorporatedand pays salaries to family members. Also included in the list of cashoutlays are debt repayment commitments, both principal and interest.

What Information Is Provided?

Operating expenses are usually not paid evenly over the course of ayear for many farm enterprises. Also, marketing patterns for many farmproducts are not evenly distributed throughout the year. Therefore,revenues usually do not flow into the business, and expenses donot flow out of the business on an equal and regular basis during theyear. This results in periods of cash deficits and surpluses.

Knowledge of the amounts of cash deficits and surpluses and thetiming and duration of each aids tremendously in setting up a line ofcredit with a lender. The projected cash flow statement clearlyidentifies when loan funds will be needed and when the lender canexpect to be repaid. This information is extremely useful injustifying loan requests, especially during financially stressfultimes.

In addition, a projected cash flow statement enables the user toidentify the amount and duration of cash surpluses, which is usefulwhen deciding among the various short-term deposit instrumentscurrently available to the investor (i.e., 3-month certificates,6-month money market certificates, money market funds, etc.).

Of course, the accuracy of the information provided by a projectedcash flow statement depends upon the accuracy of revenue and expenseprojections, the detail included in the cash flow statement, andwhether the statement is prepared for quarters, months, or evenweeks. Even though it may lack accuracy be cause of being an estimate,a projected cash flow statement does provide a projection of expectedcash deficits and surpluses, which can be updated as the yearprogresses.

How Is The Statement Organized?

Perhaps the best way to understand how a projected cash flowstatement is organized is to think in terms of a calendar, with thecolumns representing the subperiods for the planning period used inthe projection. Usually the planning period is one year, but the subperiods can be as detailed as you desire. The subperiods can representquarters, months, and even weeks.

The rows represent various categories for the beginning cashbalance, cash receipts, cash expenses, borrowing, saving, and the ending cash balance. Of course, the beginning cash balance for eachsubperiod is the ending cash balance for the previous subperiod.

A very simplified cash flow statement has been adapted from astatement developed by Thomas L. Frey and Danny A. Klinefelter(Coordinated Financial Statements for Agriculture) and is usedto explain how a projected cash flow statement is organized (handout1). The statement used here is a quarterly state ment for one yearand consists of 5 columns; a column for each of the 4 quarters plusone for projected annual totals. The number of lines necessary to listrevenues and expenses depends upon the number needed to account forall revenue and expense items for the farming operation. The simpleorganization of this statement would make it inadequate in manyfarming operations. It is used here to teach the mechanics of cashflow budgeting.

HANDOUT 1. Projected Cash Flow Statement

  Projected Entry Quarter Quarter Quarter Quarter totals-------------------------------------------------------------------------------------------1. Beginning cash balance (all readily available funds)_____________________________________________________ Operating receipts: xx xx xx xx xx2. Grain and feed _____________________________________________________3. Livestock and poultry _____________________________________________________ 4. Custom work _____________________________________________________5. _________________________ _____________________________________________________ Capital receipts: xx xx xx xx xx6. Breeding stock _____________________________________________________7. Machinery and equipment _____________________________________________________8. __________________________ _______________________________________________________ Nonfarm income: xx xx xx xx xx9. Off-farm wages10. Total cash available (add lines 1 thru 9) _____________________________________________________ Operating expenses: xx xx xx xx xx11. Fertilizer and lime _____________________________________________________12. Seed and chemicals _____________________________________________________13. Machine operation and drying _____________________________________________________14.__________________________ _____________________________________________________15.Total cash operating expenses (add lines 11 thru 14) Livestock and feed _____________________________________________________ purchases: xx xx xx xx xx16. Feeder livestock _____________________________________________________17. ______________________ _____________________________________________________ Capital expenditures: xx xx xx xx xx18.Machinery and equipment _____________________________________________________19.__________________________ _____________________________________________________ Other expenses: xx xx xx xx xx20. Family living _____________________________________________________21. Intermediate and long-term loan payments (principal) _____________________________________________________22. (interest) _____________________________________________________23. Total cash required (add lines 15 thru 22) _____________________________________________________24. Cash available less cash required (line 10 minus line 23) _____________________________________________________25. Inflows from savings (principal) _____________________________________________________26. (interest) _____________________________________________________27. Cash position before borrowing and after savings_____________________________________________________28. Money to be borrowed: (Operating loans) _____________________________________________________ (Intermediate and long- term loans) _____________________________________________________29. Oper. loan payments (principal) _____________________________________________________ (interest) _____________________________________________________30. Outflows to savings _____________________________________________________31. Ending cash balance _____________________________________________________ Loan balances (at end of period): xx xx xx xx xx32. Current year's oper. loans _____________________________________________________33. Previous year's oper. loans_____________________________________________________34. Intermediate and long-term loans _____________________________________________________35. Total loans _____________________________________________________-----------------------------------------------------------------------------------------

Cash Available

The first line of any cash flow statement is usually the beginningcash balance for the period. That balance includes all readilyavailable funds (i.e., checking accounts, cash, mutual funds withcheckwriting privileges, or arrangements for transferring funds to achecking account, etc.).

The next section is the receipt section, which is divided into threesubsections: operating receipts, capital receipts, and nonfarmincome. Operating receipts (lines 2-5) include receipts from crops,livestock, custom work, government payments, hedging accountwithdrawals, and any other cash receipts to the farm business. Eachprojected cash receipt is entered in the quarter that the cash isexpected. It is usually a good idea to include several blank linesthroughout the form (line 5 for example), so that the statement can betailored to meet your needs.

Capital receipts (lines 6-8) are cash inflows from the sale ofcapital items, such as breeding livestock, machinery, andequipment. Also, only the amount of cash expected to flow into theoperation is entered. If farmer A expects to trade a boar to farmer Band receive $50 in cash plus his new boar, only the $50 is entered infarmer A's projected cash flow statement. That amount is entered inthe quarter that the cash is expected.

Nonfarm income includes off-farm wages (line 9) and cash receivedfrom interest payments, dividends, and other nonfarm sources. Thetotal cash available for the quarter (line 10) is then calculated byadding the beginning cash balance, operating receipts, capitalreceipts, and nonfarm income.

Cash Required

The expense section is divided into four subsections: operatingexpenses, livestock and feed purchases, capital expenditures, andother expenses. Operating expenses (lines 11-14) include such thingsas seed, fertilizer, breeding expenses, real estate and propertytaxes, insurance, utilities, and veterinary. The amount for each itemis entered in the quarter when it is expected to be paid, which may bedifferent from when you actually take possession of the item.

The next subsection is labeled livestock and feed purchases (lines16 and 17) and includes cash expenses for feeder livestock as well asfor purchasing breeding livestock. Also included are cash outlaysfor feed.

The third subsection is labeled capital expenditures (lines 18 and19) and includes cash outlays to purchase machinery, equip ment,buildings, and improvements. If the dealer is to be paid in full andyou borrow the money from another lender (i.e., commercial bank, PCA,etc.), the entire amount to be paid is entered in the appropriatequarter. The cash flowing into the operation from the loan will bediscussed later.

Other expenses (lines 20-22) can include hedging account deposits,gross family living withdrawals, nonfarm business expenditures, andincome tax and social security payments. Also included in thissection are principal and interest payments due for intermediate andlong-term loans. The total cash required for the quarter (line 23) iscalculated by adding all expenses projected for the quarter.

The Cash Position

Subtracting total cash required (line 23) from total cash available(line 10) yields the cash position before borrowing and inflows fromsavings. If the cash position is negative or below a specified amount,you can transfer any money available in savings to the checkingaccount (lines 25 and 26).

If the cash position before borrowing and after savings (line 27),is still negative or below some specified amount, you must borrowthose funds needed to satisfy the deficit and/or maintain the minimumamount desired in the checking account. Line 28 provides a place toenter operating, intermediate, and long-term borrowing.

A line is also needed to schedule principal and interest paymentsfor operating loans (line 29), which lenders usually require to berepaid during the upcoming 12 months from the proceeds of theenterprises financed. For example, if operating funds are borrowedin the spring to plant the corn crop, those funds are usuallyscheduled to be repaid when the corn is expected to be sold. Ofcourse, if the corn is stored and expected to be sold the next year,then the payment should be scheduled the next year.

Two additional lines are needed to account for any cash remaining atthe end of the period (lines 30 and 31). First, when the amount ofcash is greater than the minimum balance desired, the excess willlikely be invested in a short-term security, money market fund,etc. Therefore, a line is needed to account for funds flowing out ofthe farm business and into some type of savings or short-terminvestment (line 30). This line is necessary since that amount ofcash will not be available for use by the farm business until eitherthe security matures or until the funds are withdrawn by theoperator. Line 31 is the ending cash balance for the quarter. This isalso the beginning cash balance for the next quarter.

The cash position for each quarter is then calculated sequentiallyas described above, until the ending cash balance for the last quarteris calculated. That amount then becomes the beginning cash balance forthe first quarter of the next year's projected cash flow state ment.

The last four lines (32-35) enable the borrower to keep a runningtotal of the various loan balances. The lines are labeled todistinguish between current year operating loans (line 32) andoperating loans remaining from a previous period (line 33). Thisinformation is extremely useful when applying for a line of creditfrom a lender, because the lender needs to know the maximum amountexpected to be outstanding as well as amounts expected to beoutstanding throughout the year, The balances for each period areincreased or decreased as funds are disbursed and payments are made.

Intermediate and long-term loan balances are on a separate line(line 34) and can be increased or decreased as additional funds areborrowed or payments made. The total loan balance outstanding eachperiod can then be calculated by summing the loan balances outstandingfor each type of loan and recording the total on line 35.

An Example--Fred Farmer

To illustrate how a projected cash flow statement is prepared, anexample is used to describe the anticipated cash transactions for ahypothetical farm operator, Fred Farmer. The information describingthis farming operation is presented in handout 2. To understand themechanics of completing a projected cash flow statement, the examplewill be used first to complete an annual projected cash flowstatement. Therefore, the information from handout 2 will be enteredin the column labeled Projected Totals.

An Annual Projected Cash Flow Statement

In this simple example, transfer the information contained inhandout 2 to the projected total column for your projected cash flowstate ment (handout 1). To check yourself refer to Figure 1, as thetransactions are discussed in the following paragraphs.

HANDOUT 2. Projected Cash Flow Statement Exercise

Cash transactions expected during the upcoming 12-month period:

1. The cash balance on January 1 is $2,500. (Line 1).

2. Corn to be sold during the upcoming year should generate $26,250. (Line 2).

3. Off-farm wages for the upcoming year are expected to equal $20,000. (Line 9).

4. Operating expenses of $12,500 are expected for the upcoming year. (Line 15).

5. A new piece of machinery costing $6,000 will likely be purchased;$5,000 will be borrowed from the local bank. (Line 18).

6. Family living expenses of $16,000 are expected during the upcomingyear. (Line 20).

7. Intermediate and long-term principal payments on loans areexpected to equal $11,000, with another $12,250 due ininterest. (Lines 21 and 22).

8. The farmer has a money market fund for emergencies that currentlyhas a balance of $5,000. This money will be used before additionalmoney is borrowed.

On January 1, there is $2,500 in cash, or in the checking ornegotiable order withdrawal account, or perhaps in a money market fundwith checkwriting provisions. Remember, this balance is the amount atthe end of the previous year. It is entered on line 1.

Next, expect $46,250 to flow into the operation during the upcomingperiod. This is found by adding the $26,250 from the sale of crops(line 2) to the amount of money flowing into the operation from anoff-farm job, $20,000 (line 9). Thus, the total cash available is$48,750 (line 10).

Also, expect $57,750 to flow out of the operation during theupcoming year. This is found by adding operating expenses of $12,500(line 15), capital expenditures of $6,000 (line 18), family living of$16,000 (line 20), and intermediate and long-term loan payments of$23,250; $11,000 in principal (line 21) and $12,250 in interest (line22).

The cash position at the end of the year would be minus $9,000 (line24), which is not a desirable way to end the year. At this time Fredmust think about ways to obtain some additional cash. This can beaccomplished by increasing cash available, reducing cash required,bringing in savings, or borrowing.

FIGURE 1. Projected Cash Flow Statement

Line Projectedno. Item totals---------------------------------------------------------------------------------1. Beginning cash balance $ 2,5002. Grain and feed 26,2509. Off-farm wages 20,00010. Total cash available ----------- $48,75015. Total cash operating expenses $12,50018. Machinery and equipment 6,00020. Family living 16,00021. Inter. and long-term loan payment (principal) 11,00022. Inter. and long-term loan payment (interest) 12,25023. Total cash required ----------- $57,75024. Cash available less cash required -$9,00025. Inflows from savings (principal) 5,00027. Cash position before borrowing and after savings -$4,00028. Money to be borrowed (intermediate and long-term) 5,000 -----------31. Ending cash balance $1,000---------------------------------------------------------------------------------

As you can see from the information in handout 2, on January 1 Fredhad $5,000 in a money market fund. That amount can be transferred tohis checking account to help alleviate part of his cash flow shortage(line 25). However, even after that transfer he is still short $4,000(line 27).

The next source of cash is borrowing, either in the form ofoperating funds or intermediate and long-term loans. As you probablyremember, Fred plans to borrow $5,000 when purchasing that pieceof machinery. After entering that amount on line 28, Fred has anending cash balance of $1,000 (line 31), which is the beginning cashbalance for the next year.

A Quarterly Projected Cash Flow Statement

However, the year can be divided into quarters, months, weeks, oreven days. Each division provides a more detailed projection, butnormally projected cash flow statements are done either quarterly ormonthly. A quarterly statement is often sufficient for operations withfewer transactions during a year, such as a cash grain farm. A monthlycash flow statement may be useful for operations that have a greaternumber of transactions during a year, such as a dairy or afarrow-to-finish swine operation.

Now, let's look at the items in handout 3, which provide additionalinformation on the timing of those cash transactions listed in handout2. We will use that information to complete lines 1 through 35 of theprojected cash flow statement. The transactions for the first andsecond quarters will be discussed in the following paragraphs. Thenyou should try to complete the last two quarters of the year on yourown. An answer sheet is provided for you to check your answers.

It is easier to transfer all of the information in handout 3 to theappropriate quarters of the projected cash flow statement beforetotaling any of the subsections. The following steps list the sequenceof events, and Figure 2 provides the answers for the first quarter.

Cash transactions expected during the upcoming 12-month period:

1. Cash balance on January 1 is $2,500.

2. Fred Farmer expects to sell all the corn in inventory, 4,230bushels, in July for $3.25 per bushel or approximately $13,750.

3. Continue to work full-time and receive wages of $5,000 each quarter.

4. Produce 100 bushels of corn per acre during the upcoming year on100 acres or 10,000 bushels of total production. 5,000 bushels areexpected to be sold at harvest (October) for $2.50 per bushel or$12,500. The remaining 5,000 bushels will be stored.

5. Acreage production costs for the corn are expected to be $53.00for fertilizer, $31.00 for seed and chemicals, and $41.00 for machineoperation and drying. All production expenses will probably be paid inApril, except $2,000 for machine operation and drying, which will bepaid in October.

6. Fred expects to purchase a piece of machinery on January 2 of theupcoming year that will cost $6,000; $5,000 will be borrowed and paidoff in five annual payments of $1,000 each. The first payment is duein December of the upcoming year. The interest rate is 15 percent.

7. Family living expenses will be about $16,000 during the upcomingyear and will be spread evenly over the 4 quarters.

8. Fred has a machinery loan of $10,000 at 15 percent interest. Thenext annual payment of $5,000 plus interest is due in December of theupcoming year.

9. Fred also has a $100,000 real estate loan at 10 percent. The nextannual payment of $5,000 plus interest is due in December of theupcoming year.

10. Operating loans can be obtained at an interest rate of 15percent. None is currently outstanding.

11. Fred has $5,000 in a money market fund, earning 10 percent.

12. Mr. Farmer wants to always keep at least $1,000 in his checkingaccount or cash balance, but no more than $5,000. Any excess fundswill be placed in the money market fund in $1,000 increments.

13. All loan payments and savings transactions are conducted as of theend of the quarter.

14. Fred will pay the operating loan off, before adding cash to hismoney market fund.

FIGURE 2. Projected Cash Flow Statement

 Projected Entry Q1 Q2 Q3 Q4 totals---------------------------------------------------------------------------------------1. Beginning cash balance 2,500 2,500 Operating receipts: xx xx xx xx xx2. Grain and feed 26,250 ______________________________________________3. Livestock and poultry ______________________________________________4. Custom work ______________________________________________5.______________________ ______________________________________________ Capital receipts: xx xx xx xx xx6. Breeding stock ______________________________________________7. Machinery and equipment ______________________________________________8. ____________________________ ______________________________________________ Nonfarm income: xx xx xx xx xx9. Off-farm wages 5,000 5,000 5,000 5,000 20,00010. Total cash available 7,500 48,750 (add lines 1 thru 9) ______________________________________________ Operating expenses: xx xx xx xx xx11. Fertilizer and lime 5,30012. Seed and chemicals 3,10013. Machine operation and 4,100 drying ______________________________________________14. ___________________________ ______________________________________________15. Total cash operating 0 12,500 expenses (add lines 11 thru 14) Livestock and feed purchases: xx xx xx xx xx16. Feeder livestock ______________________________________________ 17. _____________________________ ______________________________________________ Capital expenditures: xx xx xx xx xx18. Machinery and equipment 6,000 6,00019. ___________________________ ______________________________________________ Other expenses: xx xx xx xx xx20. Family living 4,000 4,000 4,000 4,000 16,00021. Intermediate and long-term loan payments (principal) 11,00022. (interest) ______________________________________________23. Total cash required 10,000 57,750 lines 15 thru 22) ______________________________________________ 24. Cash available less cash -2,500 -9,000 required (line 10 minus line 23)25. Inflows from savings (principal) 5,000 ______________________________________________26. (interest)27. Cash position before borrowing and after savings -2,500 -4,00028.Money to be borrowed: ______________________________________________ (Operating loans) (Intermediate and long- term loans) 5,000 5,00029. Oper. loan payments (principal) ______________________________________________ (interest) ______________________________________________30. Outflows to savings 031. Ending cash balance 2,500 1,000 Loan balances (at end of ______________________________________________ period): xx xx xx xx xx32. Current year's oper. loans 0 0 ______________________________________________33. Previous year's oper. loans 034. Intermediate and long-term ______________________________________________ loans 115,000 104,00035. Total loans 115,000 104,000---------------------------------------------------------------------------------------

1. We know the beginning cash balance for the year and the first quarter is $2,500 (line 1).

2. There were no cash receipts from the sale of corn in the first quarter.

3. Off-farm wages during each quarter are expected to equal $5,000. Now, this is the amount that is expected to be taken home, and not the gross amount. Since we know that amount will occur in each quarter, we can record $5,000 on line 9 for each quarter.

4. There were no operating expenses during the first quarter.

5. However, Fred expects to spend $6,000 for a piece of equipment during the first quarter (line 18).

6. Family living expenses of $4,000 are expected in every quarter (line 20).

Now let's calculate our total cash available for the first quarter:

 Line 1 Beginning cash balance $ 2,500 9 Off-farm wages + 5,000 --------- 10 Total cash available $ 7,500

Now let's calculate our total cash required for the first quarter:

Line 18 Machinery and equipment $ 6,000 20 Family living + 4,000--------- 23 Total cash required $10,000 Cash available less cash required is: Line 10 $ 7,500 23 -10,000 -------- 24 -$2,500

However, remember $5,000 was to be borrowed for the piece ofmachinery, which has not yet been taken into account. It should beentered on line 28. Now our ending cash balance is $2,500 (line 31),which is also the beginning cash balance for the second quarter.

Also, Fred still has his $5,000 in the money market fund. He alsohas a $100,000 real estate loan and a $15,000 machinery loan ($10,000original loan plus $5,000 new loan) for total intermediate andlong-term loans of $115,000 (line 34). Total loans equal $115,000(line 35).

Next, we will complete the second quarter. To check your answers,refer to Figure 3. The following steps list the sequence of events.

1. During the second quarter we again notice that no grain or livestock is expected to be sold.

2. Again, $5,000 is expected from off-farm wages.

3. Operating expenses during the second quarter include: $5,300 for fertilizer, $3,100 for seed and chemicals, and $2,100 for machinery operations.

4. Family living expenses again equal $4,000 for the quarter.

Now it is time to total.

Line 1 Beginning cash balance $ 2,500 9 Off-farm wages 5,00010 Total cash available $ 7,50015 Total cash operating expenses $10,50020 Family living 4,000 --------23 Total cash required $14,500 Cash available less cash required is: Line 10 $ 7,500 23 $-14,500 --------- 24 $-7,000

At this time Fred brings his savings into the cash flow. The inflowfrom savings is $5,000 in principal (line 25) and the interest (line26) is $250, since $5,000 was kept in the money market fund for 6months at a 10 percent interest rate.

FIGURE 3. Projected Cash Flow Statement

 Projected Entry Q1 Q2 Q3 Q4 totals--------------------------------------------------------------------------------------1. Beginning cash balance 2,500 2,500 2,500 Operating receipts: xx xx xx xx xx2. Grain and feed 26,2503. Livestock and poultry ______________________________________________4. Custom work ______________________________________________5. ____________________________ ______________________________________________ Capital receipts: xx xx xx xx xx6. Breeding stock ______________________________________________7. Machinery and equipment ______________________________________________8. ____________________________ ______________________________________________ Nonfarm income: xx xx xx xx xx9. Off-farm wages 5,000 5,000 5,000 5,000 20,00010. Total cash available 7,500 7,500 48,750 (add lines 1 thru 9) Operating expenses: xx xx xx xx xx11. Fertilizer and lime 5,300 5,30012. Seed and chemicals 3,100 3,10013. Machine operation and 2,100 4,100 drying14. ____________________________ ______________________________________________15. Total cash operating 10,500 12,500 expenses (add lines ______________________________________________ 11 thru 14) Livestock and feed purchases: xx xx xx xx xx16. Feeder livestock ______________________________________________17. ____________________________ ______________________________________________ Capital expenditures: xx xx xx xx xx18. Machinery and equipment 6,000 6,000 ______________________________________________19. ___________________________ ______________________________________________ Other expenses: xx xx xx xx xx20. Family living 4,000 4,000 4,000 4,000 16,00021. Intermediate and long-term ______________________________________________ loan payments (principal) 11,00022. (interest) 12,25023. Total cash required 10,000 14,500 57,750 lines 15 thru 22) ______________________________________________24. Cash available less cash -2,500 -7,000 -9,000 required (line 10 minus line 23)25. Inflows from savings (principal) 5,000 5,00026. (interest) 25027. Cash position before ______________________________________________ borrowing and after savings -2,500 -1,750 -4,00028. Money to be borrowed: ______________________________________________ (Operating loans) 5,000 (Intermediate and long- ______________________________________________ term loans) 5,000 5,00029. Oper. loan payments (principal) ______________________________________________ (interest) ______________________________________________30. Outflows to savings 031. Ending cash balance 2,500 3,250 1,000 Loan balances (at end of period): xx xx xx xx xx32. Current year's oper. loans 0 5,000 033. Previous year's oper. loans 0 0 ______________________________________________34. Intermediate and long-term loans 115,000 115,000 104,00035. Total loans 115,000 120,000 104,000-----------------------------------------------------------------------------------------

The cash position before borrowing and after savings (line 27) isnow minus $1,750. At this time Mr. Farmer decides to borrow $5,000 inthe form of an operating loan. This is used to cover the cash deficitand to cover any unexpected expenses that may have been omitted. Theoperating loan is entered on line 28. So, the ending cash balance is$3,250, which is also the beginning cash balance for the thirdquarter.

Total loans include the $115,000 in intermediate and long-termloans (line 34), plus the $5,000 operating loan (line 32). The totalis then $120,000 (line 35).

At this time, you should complete quarters 3 and 4. The answer sheetfor Fred Farmer's projected cash flow statement is presented in Figure4. Check your answers with the answer sheet. If there is a differenceand you do not understand the reason for that difference, pleasecontact your county Extension agent.

There is one additional point that should be made. When we preparedthe annual projected cash flow statement, did it show that Fred wouldneed an operating loan? The answer is no. That was found only when thequarterly cash flow statement was prepared. This only illustrates oneof the benefits of preparing a projected cash flow statement on a morefrequent basis; it provides more detailed information. Many peopleprepare a monthly projected cash flow statement, because they can getactual cash transactions from their monthly bank statement.

FIGURE 4. Projected Cash Flow Statement

 Projected Entry Q1 Q2 Q3 Q4 totals----------------------------------------------------------------------------------------------1. Beginning cash balance 2,500 2,500 3,250 4,815 2,500** Operating receipts: xx xx xx xx xx2. Grain and feed 13,750* 12,500 26,2503. Livestock and poultry ----------------------------------------------------4. Custom work ----------------------------------------------------5. ____________________________ ---------------------------------------------------- Capital receipts: xx xx xx xx xx6. Breeding stock ----------------------------------------------------7. Machinery and equipment ----------------------------------------------------8. _____________________________ ---------------------------------------------------- Nonfarm income: xx xx xx xx xx9. Off-farm wages 5,000 5,000 5,000 5,000 20,00010. Total cash available 7,500 7,500 22,000 22,315 48,750** (add lines 1 thru 9) ---------------------------------------------------- Operating expenses: xx xx xx xx xx11. Fertilizer and lime 5,300 5,30012. Seed and chemicals 3,100 3,10013. Machinery operation and 2,100 2,000 4,100 drying ----------------------------------------------------14. ____________________________ ----------------------------------------------------15. Total cash operating 10,500 2,000 12,500 expenses (add lines ---------------------------------------------------- 11 thru 14) Livestock and feed purchases: xx xx xx xx xx16. Feeder livestock ----------------------------------------------------17. ____________________________ Capital expenditures: xx xx xx xx xx18. Machinery and equipment 6,000 6,00019. ____________________________ ---------------------------------------------------- Other expenses: xx xx xx xx xx20. Family living 4,000 4,000 4,000 4,000 16,00021. Intermediate and long-term loan payments (principal) 11,000 11,00022. (interest) 12,250 12,50023. Total cash required 10,000 14,500 4,000 29,250 57,750 lines 15 thru 22)24. Cash available less cash -2,500 -7,000 18,000 -6,935 9,000** required (line 10 minus line 23) ----------------------------------------------------25. Inflows from savings (principal) 5,000 8,000 5,000**26. (interest) 250 20027. Cash position before ---------------------------------------------------- borrowing and after savings -2,500 -1,750 18,000 1,265 -4,000**28. Money to be borrowed: (Operating loans) 5,000 (Operating loans) ___________________________________________________ (Intermediate and long- term loans) 5,000 5,00029. Oper. loan payments (principal) 5,000 (interest) 185*30. Outflows to savings 8,000 031. Ending cash balance 2,500 3,250 4,815 1,265 1,000** Loan balances (at end of ---------------------------------------------------- period): xx xx xx xx xx32. Current year's oper. loans 0 5,000 0 0 033. Previous year's oper. loans 0 0 0 0 0 ---------------------------------------------------- 34. Intermediate and long-term 115,000 115,000 115,000 104,000 104,000 loans ----------------------------------------------------35. Total loans 115,000 120,000 115,000 104,000 104,000 *Rounded to the nearest $5. **These lines cannot be totaled across the four quarters to arriveat the projected total. This is because of the carryover effect oftaking the ending cash balance for a previous quarter and transferringthat balance to the beginning balance for the next quarter.

Where Do You Get The Numbers?

The most precise approach for arriving at the numbers to use in aprojected cash flow statement is to calculate the amount of each inputitem needed for the various crop or livestock enterprises, and theprojected production levels for those enterprises. Then an estimate isneeded for prices and the timing of expenses and revenues. Thoseamounts would then be entered in the appropriate quarter. This approach assumes the farm business is operating with a marketing plan toarrive at projected sale dates and prices. A review of last year'sactual cash flow statement would help tremendously in estimatingreceipts and expenses and in projecting the timing of those receiptsand expenses for the upcoming year.

However, some farming operations do not keep detailed records, so aless precise approach would be needed. In that case, the best placeto get the estimates is from last year's totals. Those numbers canthen be prorated to the appropriate quarter and adjusted to reflectexpected changes in production, prices, buying dates, and sellingdates. Check stubs from last year can aid in deciding when expenseswere paid and receipts received.

How Do I Monitor a Projected Cash Flow Statement?

The most precise method for monitoring a projected quarterly cashflow statement is to add 12 columns to the 5 that are already includedin the statement. One additional column each quarter allows you torecord actual cash flow entries each quarter. A year-to-date columnfor projected and actual totals allows the user to monitoryear-to-date totals for receipts and expenses. An example of theseadditions is presented in Figure 5.

The additions allow comparison of actual cash flow entries withprojected amounts, which enable calculation of differences betweenthem. This enables you to monitor the cash position of the operationthroughout the upcoming year.

However, a projected cash flow statement can be used without any ofthe three columns. The key point to remember is a projected cash flowstatement can be tailored to fit the needs of each individualoperation. It can be as simple or as complex as is needed to beworkable and useful.

FIGURE 5. Projected Cash Flow Comparison Statement

 Quarter___________________ Year-to-date Year-to-date Entry Projection Actual projection actual----------------------------------------------------------------------------------------1. Beginning cash balance (all readily available funds) _____________________________________________________ Operating receipts: xx xx xx xx2. Grain and feed _____________________________________________________3. Livestock and poultry _____________________________________________________4. Custom work _____________________________________________________5. ____________________________ _____________________________________________________ Capital receipts: xx xx xx xx6. Breeding stock _____________________________________________________7. Machinery and equipment _____________________________________________________8. ____________________________ _____________________________________________________ Nonfarm income: xx xx xx xx9. Off-farm wages _____________________________________________________10. Total cash available (add lines 1 thru 9) _____________________________________________________ Operating expenses: xx xx xx xx11. Fertilizer and lime _____________________________________________________ 12. Seed and chemicals _____________________________________________________13. Machine operation and drying _____________________________________________________14. ____________________________ _____________________________________________________15. Total cash operating expenses (add lines 11 thru 14) _____________________________________________________ Livestock and feed purchases: xx xx xx xx16. Feeder livestock _____________________________________________________17. ____________________________ _____________________________________________________ Capital expenditures: xx xx xx xx18. Machinery and equipment _____________________________________________________19. ____________________________ _____________________________________________________ Other expenses: xx xx xx xx20. Family living _____________________________________________________21. Intermediate and long-term loan payments _____________________________________________________ (principal) _____________________________________________________22. (interest) _____________________________________________________23. Total cash required add lines 15 thru 22) _____________________________________________________ 24. Cash available less cash required (line 10 minus line 23) _____________________________________________________25. Inflows from savings (principal) _____________________________________________________26. (interest) _____________________________________________________27. Cash position before borrowing and after savings _____________________________________________________28. Money to be borrowed: (Operating loans) _____________________________________________________ (Intermediate and long- term loans) _____________________________________________________29. Oper. loan payments (principal) _____________________________________________________ (interest) _____________________________________________________30. Outflows to savings31. Ending cash balance _____________________________________________________ Loan balances (at end of period): xx xx xx xx32. Current year's oper. loans _____________________________________________________33. Previous year's oper. loans _____________________________________________________ 34. Intermediate and long-term _____________________________________________________ loans _____________________________________________________ 35. Total loans _____________________________________________________----------------------------------------------------------------------------------------------

Summary

The focus of this publication is on preparing and using a projectedcash flow statement to determine when, how much, and for how long cashdeficits and surpluses are likely to exist for a farm business duringsome future period. A projected cash flow statement is described as alisting of all expected cash inflows and outflows for the comingyear. The statement can be prepared for whatever time period is mostuseful to you; quarterly, monthly, and even weekly if desired. Thisinformation enables you to communicate borrowing needs to your lenderand to establish a repayment schedule. In addition, the informationcan be used to identify possible investment opportunities during theplanning period.

An additional column each quarter enables you to record actual cashreceipts and expenses in the quarter those transactions occur. Thatinformation can then be compared to projected amounts to determinedifferences that may exist. Projected and actual year-to-date columnscan also be added to determine how year-to-date totals for receiptsand expenses compare to projections.

Finally, cash flow planning through the remainder of the 1980's willbe a major concern for lenders and borrowers. A projected cash flowstatement will greatly aid attempts to plan cash inflows and outflowsfor a farm business. Often the statement provides only a roughestimate of the cash position for the business, since marketing plans,prices, production levels, and even expenses often differ from what isprojected. However, even though a projected cash flow is but a roughestimate--if compared to no estimate--it is a great help in planningahead.

Reference

Frey, Thomas L. and Danny A. Klinefelter, 1980. CoordinatedFinancial Statements for Agriculture, Second Edition. Skokie,Illinois: Agri Finance.

Acknowledgment Appreciation is extended to Agri Finance, Skokie, Illinois, thepublisher of Coordinated Financial Statements for Agriculture fromwhich handout 1 and Figures 2 through 5 were adapted.

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Cooperative Extension work in Agriculture and Home Economics, state ofIndiana, Purdue University, and U.S. Department of Agriculturecooperating; HA. Wadsworth, Director, West Lafayette. IN. Issued infurtherance of the acts of May 8 and June 30, 1914. Purdue UniversityCooperative Extension Service is an equal opportunity/equal accessinstitution.