EC-616

Purdue University

Cooperative Extension Service

West Lafayette, IN 47907



The Projected Cash Flow Statement



Freddie L. Barnard, Assistant Professor of Agricultural Economics





A projected cash flow statement is used to evaluate cash inflows and outflows to deter. mine when, how much, and for how long cash deficits or surpluses will exist for a farm business during an upcoming time period. That information can then be used to justify loan requests, determine repayment schedules, and plan for short-term investments. 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 of expected cash inflows and outflows for an upcoming period (usually a year). Anticipated cash transactions are entered for the subperiod they are expected to occur. The length of the subperiod depends upon whether a monthly or quarterly cash flow statement is used. The word cash is crucial in this definition, because only cash items are included in a cash flow statement.

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

What Information Is Provided?

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

Knowledge of the amounts of cash deficits and surpluses and the timing and duration of each aids tremendously in setting up a line of credit with a lender. The projected cash flow statement clearly identifies when loan funds will be needed and when the lender can expect to be repaid. This information is extremely useful in justifying loan requests, especially during financially stressful times.

In addition, a projected cash flow statement enables the user to identify the amount and duration of cash surpluses, which is useful when deciding among the various short-term deposit instruments currently 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 projected cash flow statement depends upon the accuracy of revenue and expense projections, the detail included in the cash flow statement, and whether the statement is prepared for quarters, months, or even weeks. Even though it may lack accuracy be cause of being an estimate, a projected cash flow statement does provide a projection of expected cash deficits and surpluses, which can be updated as the year progresses.

How Is The Statement Organized?

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

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

A very simplified cash flow statement has been adapted from a statement developed by Thomas L. Frey and Danny A. Klinefelter (Coordinated Financial Statements for Agriculture) and is used to explain how a projected cash flow statement is organized (handout 1). The statement used here is a quarterly state ment for one year and consists of 5 columns; a column for each of the 4 quarters plus one for projected annual totals. The number of lines necessary to list revenues and expenses depends upon the number needed to account for all revenue and expense items for the farming operation. The simple organization of this statement would make it inadequate in many farming operations. It is used here to teach the mechanics of cash flow 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         xx

2.  Grain and feed             _____________________________________________________

3.  Livestock and poultry      _____________________________________________________ 

4.  Custom work                _____________________________________________________

5. _________________________   _____________________________________________________
    Capital receipts:              xx          xx         xx         xx         xx

6. Breeding stock	      _____________________________________________________

7. Machinery and equipment    _____________________________________________________

8. __________________________ _______________________________________________________
   Nonfarm income:                 xx          xx         xx         xx         xx

9. Off-farm wages

10. Total cash available
   (add lines 1 thru 9)       _____________________________________________________
   Operating expenses:             xx          xx         xx         xx         xx

11. 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         xx

16. Feeder livestock	      _____________________________________________________

17. ______________________    _____________________________________________________
   Capital expenditures:           xx          xx         xx         xx         xx

18.Machinery and equipment    _____________________________________________________

19.__________________________ _____________________________________________________
   Other expenses:                 xx          xx         xx         xx         xx

20. 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          xx

32. 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 beginning cash balance for the period. That balance includes all readily available funds (i.e., checking accounts, cash, mutual funds with checkwriting privileges, or arrangements for transferring funds to a checking account, etc.).

The next section is the receipt section, which is divided into three subsections: operating receipts, capital receipts, and nonfarm income. Operating receipts (lines 2-5) include receipts from crops, livestock, custom work, government payments, hedging account withdrawals, and any other cash receipts to the farm business. Each projected cash receipt is entered in the quarter that the cash is expected. It is usually a good idea to include several blank lines throughout the form (line 5 for example), so that the statement can be tailored to meet your needs.

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

Nonfarm income includes off-farm wages (line 9) and cash received from interest payments, dividends, and other nonfarm sources. The total cash available for the quarter (line 10) is then calculated by adding the beginning cash balance, operating receipts, capital receipts, and nonfarm income.

Cash Required

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

The next subsection is labeled livestock and feed purchases (lines 16 and 17) and includes cash expenses for feeder livestock as well as for purchasing breeding livestock. Also included are cash outlays for feed.

The third subsection is labeled capital expenditures (lines 18 and 19) and includes cash outlays to purchase machinery, equip ment, buildings, and improvements. If the dealer is to be paid in full and you borrow the money from another lender (i.e., commercial bank, PCA, etc.), the entire amount to be paid is entered in the appropriate quarter. The cash flowing into the operation from the loan will be discussed later.

Other expenses (lines 20-22) can include hedging account deposits, gross family living withdrawals, nonfarm business expenditures, and income tax and social security payments. Also included in this section are principal and interest payments due for intermediate and long-term loans. The total cash required for the quarter (line 23) is calculated 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 from savings. If the cash position is negative or below a specified amount, you can transfer any money available in savings to the checking account (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 borrow those funds needed to satisfy the deficit and/or maintain the minimum amount desired in the checking account. Line 28 provides a place to enter operating, intermediate, and long-term borrowing.

A line is also needed to schedule principal and interest payments for operating loans (line 29), which lenders usually require to be repaid during the upcoming 12 months from the proceeds of the enterprises financed. For example, if operating funds are borrowed in the spring to plant the corn crop, those funds are usually scheduled to be repaid when the corn is expected to be sold. Of course, 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 at the end of the period (lines 30 and 31). First, when the amount of cash is greater than the minimum balance desired, the excess will likely be invested in a short-term security, money market fund, etc. Therefore, a line is needed to account for funds flowing out of the farm business and into some type of savings or short-term investment (line 30). This line is necessary since that amount of cash will not be available for use by the farm business until either the security matures or until the funds are withdrawn by the operator. Line 31 is the ending cash balance for the quarter. This is also the beginning cash balance for the next quarter.

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

The last four lines (32-35) enable the borrower to keep a running total of the various loan balances. The lines are labeled to distinguish between current year operating loans (line 32) and operating loans remaining from a previous period (line 33). This information is extremely useful when applying for a line of credit from a lender, because the lender needs to know the maximum amount expected to be outstanding as well as amounts expected to be outstanding throughout the year, The balances for each period are increased 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 are borrowed or payments made. The total loan balance outstanding each period can then be calculated by summing the loan balances outstanding for 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, an example is used to describe the anticipated cash transactions for a hypothetical farm operator, Fred Farmer. The information describing this farming operation is presented in handout 2. To understand the mechanics of completing a projected cash flow statement, the example will be used first to complete an annual projected cash flow statement. Therefore, the information from handout 2 will be entered in the column labeled Projected Totals.

An Annual Projected Cash Flow Statement

In this simple example, transfer the information contained in handout 2 to the projected total column for your projected cash flow state ment (handout 1). To check yourself refer to Figure 1, as the transactions 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 upcoming year. (Line 20).

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

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


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

Next, expect $46,250 to flow into the operation during the upcoming period. 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 an off-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 the upcoming 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 (line 22).

The cash position at the end of the year would be minus $9,000 (line 24), which is not a desirable way to end the year. At this time Fred must think about ways to obtain some additional cash. This can be accomplished by increasing cash available, reducing cash required, bringing in savings, or borrowing.

FIGURE 1. Projected Cash Flow Statement



Line                                                    Projected
no.  Item                                                totals
---------------------------------------------------------------------------------
1.   Beginning cash balance                             $ 2,500
2.   Grain and feed                                      26,250
9.   Off-farm wages                                      20,000
10.  Total cash available                             -----------      $48,750
15.  Total cash operating expenses                      $12,500
18.  Machinery and equipment                              6,000
20.  Family living                                       16,000
21.  Inter. and long-term loan payment (principal)       11,000
22.  Inter. and long-term loan payment (interest)        12,250
23.  Total cash required                              -----------      $57,750
24.  Cash available less cash required                                 -$9,000
25.  Inflows from savings (principal)                                    5,000
27.  Cash position before borrowing and after savings                  -$4,000
28.  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 Fred had $5,000 in a money market fund. That amount can be transferred to his 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 of operating funds or intermediate and long-term loans. As you probably remember, Fred plans to borrow $5,000 when purchasing that piece of machinery. After entering that amount on line 28, Fred has an ending cash balance of $1,000 (line 31), which is the beginning cash balance for the next year.

A Quarterly Projected Cash Flow Statement

However, the year can be divided into quarters, months, weeks, or even days. Each division provides a more detailed projection, but normally projected cash flow statements are done either quarterly or monthly. A quarterly statement is often sufficient for operations with fewer transactions during a year, such as a cash grain farm. A monthly cash flow statement may be useful for operations that have a greater number of transactions during a year, such as a dairy or a farrow-to-finish swine operation.

Now, let's look at the items in handout 3, which provide additional information on the timing of those cash transactions listed in handout 2. We will use that information to complete lines 1 through 35 of the projected cash flow statement. The transactions for the first and second quarters will be discussed in the following paragraphs. Then you should try to complete the last two quarters of the year on your own. An answer sheet is provided for you to check your answers.

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


HANDOUT 3. Projected Cash Flow Statement Exercise

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, 4,230 bushels, 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 on 100 acres or 10,000 bushels of total production. 5,000 bushels are expected 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 $53.00 for fertilizer, $31.00 for seed and chemicals, and $41.00 for machine operation and drying. All production expenses will probably be paid in April, except $2,000 for machine operation and drying, which will be paid in October.

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

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

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

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

10. Operating loans can be obtained at an interest rate of 15 percent. 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 checking account or cash balance, but no more than $5,000. Any excess funds will be placed in the money market fund in $1,000 increments.

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

14. Fred will pay the operating loan off, before adding cash to his money 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          xx

2.  Grain and feed                                                          26,250
			              ______________________________________________

3.  Livestock and poultry	      ______________________________________________	

4.  Custom work			      ______________________________________________

5.______________________	      ______________________________________________
    Capital receipts:                      xx       xx      xx       xx         xx

6.  Breeding stock		      ______________________________________________

7.  Machinery and equipment           ______________________________________________

8.  ____________________________      ______________________________________________
    Nonfarm income:                        xx       xx      xx       xx         xx

9.  Off-farm wages                      5,000    5,000   5,000    5,000     20,000

10. Total cash available                7,500                               48,750
    (add lines 1 thru 9)	      ______________________________________________

    Operating expenses:                    xx       xx      xx       xx         xx

11. Fertilizer and lime                                                      5,300

12. Seed and chemicals                                                       3,100

13. 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         xx

16. Feeder livestock		    ______________________________________________ 

17. _____________________________   ______________________________________________
    Capital expenditures:                  xx       xx      xx       xx         xx

18. Machinery and equipment             6,000                                6,000

19. ___________________________     ______________________________________________ 
    Other expenses:                        xx       xx      xx       xx         xx

20. Family living                       4,000    4,000   4,000    4,000     16,000

21. Intermediate and long-term
    loan payments (principal)                                               11,000

22. (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                               -4,000

28.Money to be borrowed:             ______________________________________________ 
    (Operating loans)
    (Intermediate and long-
    term loans)                         5,000                                5,000

29. Oper. loan payments
    (principal)			      ______________________________________________
    (interest)			      ______________________________________________

30. Outflows to savings                                                          0

31. Ending cash balance                 2,500                                1,000

    Loan balances (at end of          ______________________________________________
    period):                               xx       xx      xx       xx       xx

32. Current year's oper. loans              0                                  0
                                      ______________________________________________

33. Previous year's oper. loans             0

34. Intermediate and long-term        ______________________________________________
    loans                              115,000                             104,000

35. 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 of machinery, which has not yet been taken into account. It should be entered 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 also has a $100,000 real estate loan and a $15,000 machinery loan ($10,000 original loan plus $5,000 new loan) for total intermediate and long-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                  5,000
10    Total cash available          $ 7,500
15    Total cash operating expenses $10,500
20    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 inflow from savings is $5,000 in principal (line 25) and the interest (line 26) is $250, since $5,000 was kept in the money market fund for 6 months 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         xx

2.  Grain and feed                                                        26,250

3.  Livestock and poultry          ______________________________________________

4.  Custom work			   ______________________________________________

5.  ____________________________   ______________________________________________
    Capital receipts:                  xx         xx      xx       xx         xx

6.  Breeding stock		   ______________________________________________

7.  Machinery and equipment	   ______________________________________________

8.  ____________________________   ______________________________________________
    Nonfarm income:                    xx         xx      xx       xx         xx

9.  Off-farm wages                  5,000      5,000   5,000    5,000     20,000

10. Total cash available            7,500      7,500                      48,750
    (add lines 1 thru 9)
    Operating expenses:                xx         xx      xx       xx         xx

11. Fertilizer and lime                        5,300                       5,300

12. Seed and chemicals                         3,100                       3,100

13. Machine operation and                      2,100                       4,100
    drying

14. ____________________________   ______________________________________________

15. Total cash operating                      10,500                      12,500
    expenses (add lines            ______________________________________________
    11 thru 14)
    Livestock and feed
    purchases:                         xx         xx      xx       xx         xx

16. Feeder livestock               ______________________________________________

17. ____________________________   ______________________________________________
    Capital expenditures:              xx         xx      xx       xx         xx

18. Machinery and equipment         6,000                                  6,000
				  ______________________________________________

19. ___________________________   ______________________________________________ 
    Other expenses:                    xx         xx        xx     xx         xx

20. Family living                   4,000      4,000     4,000  4,000     16,000

21. Intermediate and long-term    ______________________________________________
    loan payments (principal)                                             11,000

22. (interest)                                                            12,250

23. 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                      5,000

26. (interest)                                   250

27. Cash position before	   ______________________________________________
  borrowing and after savings      -2,500     -1,750                     -4,000

28. Money to be borrowed:          ______________________________________________
    (Operating loans)                          5,000
    (Intermediate and long-        ______________________________________________
     term loans)                    5,000                                 5,000

29. Oper. loan payments
    (principal)			   ______________________________________________
    (interest)			   ______________________________________________

30. Outflows to savings                                                       0

31. Ending cash balance             2,500      3,250                      1,000
    Loan balances (at end of
    period):                          xx         xx      xx       xx        xx

32. Current year's oper. loans         0      5,000                          0

33. Previous year's oper. loans        0          0
                                  ______________________________________________

34. Intermediate and long-term
    loans                           115,000     115,000                  104,000

35. Total loans                     115,000     120,000                  104,000

-----------------------------------------------------------------------------------------


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

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

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

There is one additional point that should be made. When we prepared the annual projected cash flow statement, did it show that Fred would need an operating loan? The answer is no. That was found only when the quarterly cash flow statement was prepared. This only illustrates one of the benefits of preparing a projected cash flow statement on a more frequent basis; it provides more detailed information. Many people prepare a monthly projected cash flow statement, because they can get actual 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          xx

2.  Grain and feed                                      13,750*    12,500      26,250

3.  Livestock and poultry          ----------------------------------------------------

4.  Custom work		           ----------------------------------------------------

5.  ____________________________   ----------------------------------------------------
    Capital receipts:                  xx         xx         xx        xx          xx

6.  Breeding stock		   ----------------------------------------------------

7.  Machinery and equipment        ----------------------------------------------------

8.  _____________________________  ----------------------------------------------------
    Nonfarm income:                    xx         xx         xx        xx          xx

9.  Off-farm wages                  5,000      5,000      5,000     5,000      20,000

10. Total cash available            7,500      7,500     22,000     22,315                 48,750**
    (add lines 1 thru 9)           ----------------------------------------------------
    Operating expenses:                xx         xx         xx        xx          xx

11. Fertilizer and lime                        5,300                            5,300

12. Seed and chemicals                         3,100                            3,100

13. 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          xx

16. Feeder livestock               ----------------------------------------------------

17. ____________________________
    Capital expenditures:              xx         xx        xx         xx          xx

18. Machinery and equipment         6,000                                       6,000

19. ____________________________   ----------------------------------------------------
    Other expenses:                     xx        xx         xx        xx          xx

20. Family living                    4,000     4,000      4,000     4,000      16,000

21. Intermediate and long-term
    loan payments
    (principal)                                                    11,000      11,000

22. (interest)                                                     12,250       12,500

23. 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                  200

27. 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                                       5,000

29. Oper. loan payments
    (principal)                                          5,000
    (interest)                                            185*

30. Outflows to savings                                  8,000                      0

31. Ending cash balance             2,500      3,250     4,815      1,265     1,000**
    Loan balances (at end of	  ----------------------------------------------------
    period):                           xx         xx        xx         xx          xx

32. Current year's oper. loans          0      5,000         0          0           0

33. 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 arrive
at the projected total. This is because of the carryover effect of
taking the ending cash balance for a previous quarter and transferring
that 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 a projected cash flow statement is to calculate the amount of each input item needed for the various crop or livestock enterprises, and the projected production levels for those enterprises. Then an estimate is needed for prices and the timing of expenses and revenues. Those amounts would then be entered in the appropriate quarter. This approach assumes the farm business is operating with a marketing plan to arrive at projected sale dates and prices. A review of last year's actual cash flow statement would help tremendously in estimating receipts and expenses and in projecting the timing of those receipts and expenses for the upcoming year.

However, some farming operations do not keep detailed records, so a less precise approach would be needed. In that case, the best place to get the estimates is from last year's totals. Those numbers can then be prorated to the appropriate quarter and adjusted to reflect expected changes in production, prices, buying dates, and selling dates. Check stubs from last year can aid in deciding when expenses were paid and receipts received.

How Do I Monitor a Projected Cash Flow Statement?

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

The additions allow comparison of actual cash flow entries with projected amounts, which enable calculation of differences between them. This enables you to monitor the cash position of the operation throughout the upcoming year.

However, a projected cash flow statement can be used without any of the three columns. The key point to remember is a projected cash flow statement can be tailored to fit the needs of each individual operation. It can be as simple or as complex as is needed to be workable 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              xx

2.  Grain and feed		   _____________________________________________________

3.  Livestock and poultry          _____________________________________________________

4.  Custom work                    _____________________________________________________

5.  ____________________________   _____________________________________________________
    Capital receipts:                   xx          xx          xx              xx

6.  Breeding stock		   _____________________________________________________

7.  Machinery and equipment        _____________________________________________________

8.  ____________________________   _____________________________________________________ 
    Nonfarm income:                     xx          xx          xx              xx

9.  Off-farm wages		   _____________________________________________________

10. Total cash available
    (add lines 1 thru 9)	   _____________________________________________________
    Operating expenses:                 xx          xx          xx              xx

11. 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

16. Feeder livestock		   _____________________________________________________

17. ____________________________   _____________________________________________________
    Capital expenditures:               xx          xx          xx              xx

18. Machinery and equipment        _____________________________________________________

19. ____________________________   _____________________________________________________
    Other expenses:                     xx          xx          xx              xx

20. 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

32. 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 projected cash flow statement to determine when, how much, and for how long cash deficits and surpluses are likely to exist for a farm business during some future period. A projected cash flow statement is described as a listing of all expected cash inflows and outflows for the coming year. The statement can be prepared for whatever time period is most useful to you; quarterly, monthly, and even weekly if desired. This information enables you to communicate borrowing needs to your lender and to establish a repayment schedule. In addition, the information can be used to identify possible investment opportunities during the planning period.

An additional column each quarter enables you to record actual cash receipts and expenses in the quarter those transactions occur. That information can then be compared to projected amounts to determine differences that may exist. Projected and actual year-to-date columns can also be added to determine how year-to-date totals for receipts and expenses compare to projections.

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

Reference

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

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


New 1/86

Cooperative Extension work in Agriculture and Home Economics, state of Indiana, Purdue University, and U.S. Department of Agriculture cooperating; HA. Wadsworth, Director, West Lafayette. IN. Issued in furtherance of the acts of May 8 and June 30, 1914. Purdue University Cooperative Extension Service is an equal opportunity/equal access institution.