RM5-7.0
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Cash Flow Projection for Operating Loan Determination


Larry N. Langemeier, Danny Klinefelter and Dean McCorkle*

A cash flow statement can be simply described as a record of the dollars coming in and the dollars going out of a business. It shows where the money comes from (the inflow of cash) and where the money goes (the outflow of cash).

Actual and Projected Cash Flow

A record of cash inflow and outflow that has already occurred in a business is an actual or historical cash flow. An estimate or forecast of cash inflow and outflow into some future period is a cash flow projection. The actual cash flow of a business provides important information for making a cash flow projection into the future. The cash flow projection provides information on the cash generating ability and the cash requirements of a business and it indicates the timing of both.

Total Business and Partial Business Cash Flow

A cash flow can be set up for either the entire farm business (including family living expenses and nonfarm income) or it can be set up to study only a segment of the business. For example, it may summarize all the cash expenses and income from a specific enterprise. A cash flow projection will often include only the cash inflow and outflow effect of a proposed business expansion.

Long-Run Profitability vs. Short-Run Feasibility

Two management questions that need to be studied regarding proposed business changes are long-run profitability and short-run feasibility. Long-run profitability refers to a period of 8 to 10 years or more and is usually studied through the use of projected income statements.

Short-run feasibility refers to the income-generating ability of a business in a short period of time, usually 1 year to 3 or 5 years, and is usually studied through the use of a projected cash flow. The Cash Flow Projection form in this leaflet can be used to study the short-run feasibility of a business change. It has been designed specifically to project the operating loan balance of a farm business for each monthly period.

Preparing a Cash Flow Projection

Information for preparing a cash flow projection may come from historical farm records, tax returns, and other applicable information you may have.

A cash flow projection is made periodically- monthly, bimonthly, quarterly, semiannually or annually. This cash flow projection form is designed to be used on a monthly basis.

The "Annual Estimate" column should be filled in first. Then the annual estimate may be allocated to the various months or periods.

Directions for arriving at the "Total Cash Inflow," "Total Cash Outflow," "Net Cash Flow," and "Projected Operating Loan Balance" are given on the form.


Annual Estimate Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Actual Cash Flow
Cash Inflow Items                                                                                                         Estimated Total Cash Inflow
1 Livestock: Background Cattle  144,200        99,200 45,000                
2 Market Hogs-Sows  191,200 800 47,000     900 47,000 700   45,000 800   49,000
3 Crops: Wheat  52,500     26,500               26,000  
4 Grain Sorghum  2,700           2,700            
 5
6 Distributions from cooperatives  400   400                    
7 Agricultural program payments  3,100   1,500             1,500      
8 Commodity credit loans                           
9 Crop insurance proceeds                           
10 Custom hire                           
11 Other farm income, gas refunds, etc.  7,500 5,500             400       1,600
12 TOTAL FARM 
CASH INFLOW (Add lines 1-11) 		 401,600 6,300 48,950 125,700 45,000 900 49,700 700 400 46,550 800 26,000 50,600
13 Non-farm business income and wages  4,200 800 900 900 800 800                
14 Non-farm dividends and interest  200                       200
15 Gifts, inheritance and other non-farm income                           
16 TOTAL CASH INFLOW (Except Loans) (Add lines 12-15)  406,00 7,100 49,850 126,600 45,800 1,700 49,700 700 400 46,550 800 26,000 50,800
                                                          Estimated Total Cash Outflow
17 Breeding fees, livestock marketing, and other livestock expense  4,600 500 700 500     200   200   1,000 1,100 400
18 Chemicals-herbicides, insecticides, etc.  4,000   500   2,700       800        
19 Conservation expense  500                 500      
20 Custom hire, trucking, freight, lease  2,400             2,400          
21 Feed purchased  130,000 5,000 20,000   25,000 10,000 5,000   15,000 5,000    7,500 37,500
22 Fertilizer, lime  7,000       3,100       2,000       1,900
23 Gasoline, fuel, oil  10,000       5,000       3,000       2,000
24 General farm insurance  2,200         2,200              
25 *Interest  13,100   5,600 2,500 4,000       1,000        
26 Labor hired  18,200 1,500 1,500 1,500 1,500 1,500 1,500 1,700 1,500 1,500 1,500  1,500 1,500
27 Cash farm rent  7,800         3,900            3,900  
28 Repairs, maintenance, and other machinery expense  9,400   5,200   200 400 800 600   1,200 600  400  
29 Seeds, plants purchased, other crop expense  3,100     3,100                  
30 Storage, warehousing                           
31 Supplies purchased, general                             
32 Real and personal taxes  2,500           1,300           1,200
33 Utilities  4,800 400 400 300 500 500 600 400 200 300 300  400 500
34 Veterinary fees, medicine  3,900   400       400       1,500  1,600  
35 Auto expenses  600 200   100       100   100     100
36 Other farm expenses- Farm organization fees, publications, etc.  900 100   300       100   200     200
37 TOTAL FARM CASH OPERATING EXPENSES (Add lines 17-36)  225,000 7,700 34,300 8,300 42,000 18,500 9,800 5,300 23,700 8,800 4,900  16,400 45,300
38 Livestock purchases  125,400                   125,400    
39 *Machinery,  equipment (cash payments, principal)  6,200       4,200       2,00        
40 *Buildings (cash payments, principal)  2,900       2,900                
41 *Land purchases (cash payments, principal)  5,200               5,200        
42 TOTAL FARM CASH OUTFLOW (Add lines 37-41)  364,700 7,700 34,300 8,300 49,100 18,500 9,800 5,300 30,900 8,800 130,300  16,400 45,300
43 Family living expenses  30,000 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500  2,500 2,500
44 State income tax  1,100   1,100                       
45 Federal income tax and social security  5,000   5,000                      
46 Non-farm business expenses  300       100       100     100  
47 Other non-farm and family cash outflow  400   100       100     100    100  
48 TOTAL CASH OUTFLOW (lines42-47) (except operating loan Payments) 401,500 10,200 43,000 10,800 1,700 21,000 12,400 7,800 33,500 11,400 132,800 19,100 47,800
49 2* NET CASH FLOW (+or-)  (line 16 minus line 48) (except Loan Receipts  Operating Loan Payments) 4,500 -3,100 6,850 115,800 -5,900 -19,300 37,300 -7,100 -33,100 35,150 -132,000 6,900 3,000
50 3* Projected Operating Loan Balance (operating Loan carried over from last period $100,000) XXXX 103,100 96,250 19,550 (surplus) 13,650 (surplus) -5,650 31,650 (surplus) 24,550 (surplus) 8,550 26,600 (surplus) 105,400 98,500 95,500

Table End Notes 

*Principal payments on all loans not a part of this operating budget go on lines 39-41 All interest goes on line 25.

2*Add negative "Net Cash Flow" figures of each period to "Projected Operating Loan Balance" of previous period to arrive at "Projected Operating Loan Balance" for each period. Similarly, subtract positive "Net Cash Flow" figures from "Projected Operating Loan Balance" of previous period.

3* The purpose of line 50 is to provide information for estimating the amount of operating borrowings needed in each period. The cash inflow and outflow items above do not include receipt or payment of operating loans.

NOTE: To calculate the net cash flow for the farm business alone, subtract line 42 from line l2.



Interpretation of a Cash Flow Projection

To illustrate the use of the Cash Flow Projection form, a sample set of figures has been recorded on the form.

In the example, line 16 shows the total cash inflow (not including loan receipts) and line 48 shows the total cash outflow (not including operating loan payments). Net cash flow is the difference between cash inflow and cash outflow and is shown on line 49 for the annual estimate and for each monthly period. 

If the cash inflow for the period is greater than the cash outflow for the period, the net cash flow is positive. If the opposite is true, the net cash flow is negative. For example, the January projected total cash inflow of $7,100 (line 16) is less than the total cash outflow of $10,200 so the net cash flow for January is -$ 3,100 (line 49). In March, the total cash inflow of $126,600 (line 16) is greater than the total cash outflow of $10,800 (line 48), leaving a net cash flow of $115,800 (line 49).

The projected operating loan balance for each month is calculated on line 50. The operating loan carried over from the last period should be written in the appropriate space after the caption on line 50. In the example the operating loan carried over from the previous December is $100,000. For each monthly period, the projected operating loan balance is determined by combining the previous balance with line 49 net cash flow for that period. A negative cash flow figure for a month increases the operating loan balance so it is added to the previous projected operating loan balance to determine the projected operating loan balance for that period. For example, the January net cash flow of (-$ 3,100) is combined with the $100,000 operating loan carried over from the previous December to arrive at a January projected operating loan balance of $103,100.

A positive net cash flow for a month reduces the previous month's projected operating loan balance. For example, the March net cash flow of $115,800 (line 49) is subtracted from the February projected operating loan balance of $96,250 (line 50), leaving a March projected surplus of $19,950 (line 50). If the net cash flow for a month is greater than the projected operating loan balance for the previous month, the difference can be labeled surplus.

The projected operating loan balances (line 50) for each month can be used as a guide in projecting the approximate amount of loan funds needed and the timing of the loan fund needs.

What Will a Cash Flow Projection Do

As farm businesses grow and as larger quantities of cash are needed, a cash flow projection becomes a more essential tool in the financial management of farm businesses. A cash flow projection gives the farm operator a basis for studying the financing of the business. It indicates how much needs to be borrowed and when it is needed.

A cash flow projection provides for "control" of the business. By comparing the projected cash flow to the actual cash flow that occurs, the variance of each item can be noted. If receipts are less than expected or expenses more than expected, the cash flow will alert the manager to a possible problem.

A cash flow projection helps in planning additional investments in the farm business. To be sound, an investment must be profitable in the long run. It must also be able to generate enough cash to make the payments on principal and interest.

*Extension Agricultural Economist, Kansas State University Agricultural Experiment Station and Cooperative Extension Service; Professor and Extension Economist and Extension Program Specialist-Risk Management, The Texas A&M University System.

 

Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board, and the Texas Farm Bureau.

 

Produced by Agricultural Communications, The Texas A&M University System 

Extension publications can be found on the Web at: http://agpublications.tamu.edu

 

Educational programs of the Texas Agricultural Extension Service are open to all citizens without regard to race, color, sex, disability, religion, age or national origin. 

Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and June 30, 1914, in cooperation with the United States Department of Agriculture. Chester P. Fehlis, Deputy Director, Texas Agricultural Extension Service, The Texas A&M University System.
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