3 reasons why grain farmers need a cash flow statement
Understanding your cash flow needs is an important business management skill, giving you the knowledge and agility to act on opportunities as they come up.
Cash flow categories are:
Cash flow from operations: the cash that flows into your farm business, less the cash outflow.
Investing cash flow: the cash the farm uses to invest in capital assets such as machinery and the cash earned in the sale of capital assets that goes back into the farm cash flow.
Financing cash flow: the cash generated by financed capital asset purchases and the cash for the principal payments of long-term debts.
These cash flow categories are outlined by accountants in your farm’s year-end statement of cash flows as part of your financial statement. The Statement of Cash Flow is a rich source of information that can form the basis of a discussion in your farm business and planning meetings to determine the main sources of cash flows for your farm.
Cash flow statements vary by farm sector, bringing unique information to the farmers. Here are three important reasons grain farmers need a cash flow statement:
1. Grain farming is cyclical, with most expenses paid during the spring planting and growing seasons
These are a period of significant reductions of the cash balance on grain farms. Identifying the cash flow from operations needs during this time can indicate the amount of an operating loan the farm business might require to cover expenses in a fiscal period. This gives you time to establish the credit facilities you need with your lenders well before the busy grain growing season. A cash flow statement can aid your grain marketing strategy to plan sales when cash flow is needed, allowing you to search for marketing opportunities that match cash flow needs.
2. Commodity sales are usually driven by price, which is reliant on market fluctuations
Grain producers are speculators when holding inventories for higher prices, hoping for improved profitability. A cash flow statement can aid in your grain marketing strategy to help plan sales when cash flow is needed. This allows you to search out marketing opportunities that match your cash flow needs and potentially reduce interest costs on operating debt while giving you peace of mind when making a sale.
3. When making capital purchases, it helps to know your excess cash flow
Knowing how much excess cash flow your grain operation will have can help determine the amount of a downpayment you can afford to make and help identify how long you want to amortize the loan. If cash flows are uncertain, increasing a loan's amortization period can help reduce the annual cash outflows needed to make principal payments in lean years. You can reduce your interest costs by making lump sum payments in years when your grain operation is flush with cash.
Preparing a comprehensive cash flow statement for your grain operation can help identify areas of concern early in your fiscal period, which can go a long way in reducing your mental stress and allowing you to be ahead of the curve when cash flow needs arise.
Creating cash flow statements
Start with your bank balance, add all expected cash inflows for the month and subtract planned cash outflows to arrive at an end-of-the-month cash position.
Preparing cash flow statements at the beginning of the fiscal period highlights ahead of time when farmers need cash and identifying when there will be surplus cash. Every month, cash flow statements report all three types of cash flows.
Lance is a chartered accountant with over 20 years of experience in public practice working directly with agriculture producers. Lance uses his knowledge and experience to assist producers with transition planning, intergenerational transfers, and tax reorganizations. Along with his wife Marie and their two boys, Lance is living his life ambition operating LDS Farms, a cereal, oilseed and pulse farm in Central Saskatchewan.
Presenting at: FCC Workshops, FCC Business Essentials
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