- - AGRICULTURE CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1300) Unit Title: AGRIBUSINESS ACCOUNTING __________________________________________________________________________ (CLF1303) Topic: CASH FLOW STATEMENTS Time Year(s) 2 Hours 3 / 4 __________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (I-1) - Describe the components of a cash flow statement. (I-2) - Describe the benefits of cash flow planning. (I-3) - List methods for altering cash flow. (I-4) - Complete a cash flow statement. Special Materials and Equipment: Copy of the California Vocational Agriculture Record Book, computers and computer software References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Resources: Deere & Company. (1987). FARM AND RANCH BUSINESS MANAGEMENT (2nd ed.). Available from: John Deere Technical Services, Department F, John Deere Rd., Moline, IL 61265. Evaluation: Completion of activity assignments TOPIC PRESENTATION: CASH FLOW STATEMENTS A. The cash flow statement shows the actual movement of cash in and out of the business throughout the year. The cash flow statement: 1. Shows where the cash came from and where the cash went 2. Reports only actual cash movement 3. Summarizes cash movement over a definite period of time 4. Acts as a check on income and expense records (Inflows = Outflows) 5. Is useful in planning for short-term borrowing a. The cash flow statement shows when the firm will need additional operating capital, and when it will be able to pay it back. 6. Is the marketing plan for the year a. The cash flow statement can be used to improve the cropping or livestock production system so that cash flow is evened out and the need for short-term borrowing is minimized. B. There are two forms of the cash flow statement: 1. The cash flow summary which shows the movement of cash during the past year 2. The cash flow projection (budget or plan) 3. Comparison of the actual movement of cash during one year with the projected movement of cash for that year helps to improve the cash flow plan for the following year. ============================================================================== ***INSTRUCTORS PLEASE NOTE *** There is no summary of cash flow in the California Vocational Agriculture Record Book. For examples of a cash flow projection and cash flow summary, see Deere's FARM RANCH AND BUSINESS MANAGEMENT, page 2-33 (Figure 28, Cash Flow Summary) and page 6-5 (Cash Flow Projection). These examples are also useful as sources of data for use in spreadsheet exercises. ============================================================================== C. There are two major components of the cash flow statement: 1. Cash inflows which include: a. Operating receipts b. Farm capital sales c. New money borrowed d. Non-farm income 2. Cash outflows which include: a. Operating expenses b. Capital purchases c. Taxes d. Debt payment e. Family living expenses (for owner-operators) D. Detail of Cash Inflows 1. Operating receipts, which include: a. All sales from various enterprise activities b. Government payments c. Other farm income d. Investment earnings 2. Capital sales, which include sales of: a. Breeding livestock b. Machinery and equipment c. Vehicles d. Land 3. Other non-farm income, which includes: a. Wages and salaries from other work (owner-operators only) E. Detail of Cash Outflows 1. Operating expenses: a. Hired labor b. Supplies (such as fuel, feed, and fertilizer) c. Taxes d. Insurance e. Rents f. Utilities 2. Capital purchases such as: a. Breeding livestock b. Machinery and equipment c. Vehicles d. Land 3. Debt service (payments of principal and interest on all loans) F. A cash flow projection is more difficult to do than a cash flow summary. However, a cash flow projection is very useful for planning purposes. The benefits of cash flow planning are: 1. Purchases can be planned to take advantage of price fluctuations or sales. 2. Loans can be taken out only for the periods when they are really needed. 3. It provides information for an owner-operator about the best times to pay major family expenses. 4. It shows a firm's probable cash position at various times of the year; this is useful in long-term financial planning and provides bankers with information regarding creditworthiness. G. Steps in Making a Cash Flow Projection: 1. Plan the livestock and cropping enterprises. 2. Estimate the monthly expenses--fixed and variable--for each operation. 3. Estimate purchase and sale prices and times of purchase or sale for capital items. 4. Estimate the quantity and sale price of products as well as the probable sale dates. 5. Determine when payments on existing loans are due. 6. Determine when additional cash will be needed to meet expenses. 7. Determine when cash will be available to pay off any debt. H. When the cash flow projection is compared with the cash flow summary for a given year, changes in cash flow for the following year may be desirable. Methods for altering cash flow include: 1. Reschedule borrowing and debt payment. 2. Change the cropping mix to have some crop for sale in several different months. 3. Hold crops in storage for sale over a longer period of time. 4. Plan succession planting so the crop matures and is available for sale over a longer period of time. 5. Add livestock enterprises which require shorter production periods. 6. Delay purchases or maintenance. 7. Find less costly technology for achieving the same ends. _________________________________________________________________ ACTIVITY: 1. Review the cash flow projection on pp. 6-4 and 6-5 in Deere. Answer the following questions: In what months are operating loans needed? In which month is the most money borrowed? In which month is the total outstanding debt the greatest? When is the first payment on the operating loan made? When is the operating loan paid off? When are expenses greatest? When are operating receipts highest? What does the cash position tell the manager? What does the cash flow projection reveal about the financial condition of the farm that is not covered by the balance sheet or earnings statement? 2. Use the data from Deere (either from the Cash Flow Statement or from the Cash Flow Projection) to create a cash flow statement which automatically calculates the various totals. _________________________________________________________________ 12/12/91 EEZ/JA/sg #%&C