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The Cash Flow Statement
 

The Cash Flow Statement

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    The Cash Flow Statement The Cash Flow Statement Document Transcript

    • The Cash Flow Statement A cash flow statement is one of four financial statements that a producer needs to complete and analyze each year. The cash flow statement provides a monthly statement of cash inflows and outflows of the business over a period of time, usually twelve months. The cash flow statement can be for the past or can be projected for a future period. In either case, it accomplishes four things. 1. It outlines cash coming in to the operation and is available to be used for purchases. 2. It details cash outflows (expenses) by account and by month. 3. It illustrates any month where there is a cash surplus or deficit. 4. It reconciles the beginning cash balance with the ending cash balance. A producer can use the cash flow statement to plan for those months where cash inflow will not meet expenses or when to purchase capital assets. Creditors normally require some type of cash flow statement to know when loans can be repaid. What does it look like? The cash flow statement can be prepared like an income statement with the accounts down the left side. However, unlike the income statement, across the top are columns representing months. At the bottom, there is a reconciliation showing the beginning cash balance, the net cash increase or decrease, and the ending cash balance. The cash flow is created from historical farm records, tax records and any other applicable information that you have. The projected cash flow statement is best prepared based on historical cash flows and enterprise budgets. See the Enterprise Budget section of this curriculum. A producer will record the business’s daily cash transactions on the transaction log. Each time cash is received, it should be recorded on the corresponding cash inflow log respective of the enterprise or center. Likewise, when cash is spent, it should be recorded on the corresponding cash outflow log respective of the enterprise or center. See the Transaction Log section of this curriculum. Next, the producer will total each center by account and by month. It is important to separate inflows and outflows by month. The producer will then move the totals to the cash flow worksheet. At the end of the year, totals for each center should be recorded on the cash flow worksheet by account and by month. These are then transferred to the cash flow report. Duckworth, Brenda, Stan Bevers, Rob Borchardt, and Blake Bennett. Department of Ag Economics, Texas Cooperative Extension, Texas A&M University. May 2003.
    • Why do you need one? The cash flow statement is an important part of financial planning for the producer. By completing the statement, the producer can determine when cash will be available versus when cash will be short. A producer can then plan for purchases or document to a lender when credit will be needed. It provides control for the producer. A cash flow statement also assists in planning for capital purchases. Any investment must be profitable in the long run. It must also be able to generate enough cash to make the principal and interest payments. How is it constructed? The historical cash flow statement is based on cash transactions within a defined period, usually twelve months. The Transaction Log is a record of cash inflows and outflows by enterprise. All cash transactions throughout the year should be recorded on these forms. Steps for constructing the Historical Cash Flow Report: 1. Record daily cash transactions by enterprise in the transaction log. (Total each month.) 2. At the end of the year, total each enterprise by account (vertically). 3. Total each month (horizontally.) This figure will be a “check figure” so that calculation errors are minimized. 4. Record account totals by month to the Cash Flow Worksheet. 5. Total, by month, all cash transactions. 6. Record to final Cash Flow Report. Skip 3 lines between monthly data for calculating totals per account by month. Add the “check figures” by month from the transaction log and check it with the totals by month on the final cash flow report. 7. Check beginning and ending cash balances (usually checking account balances) to make sure they reconcile with report. Producers must reconcile checking accounts. Beginning and ending balances reflect the register balance, not the bank statement- outstanding checks and deposits are included in the cash flow reports, but may not be included in the bank statement. Steps for constructing the Projected Cash Flow Report: 1. Complete enterprise budgets. See the Enterprise Budgets section of this curriculum. L5.2
    • 2. Record totals by month and by account to the Cash Flow Worksheet as above. 3. Adjust for new production practices, or other foreseeable changes. 4. Total and record results to the final Cash Flow Report, but specify in the title that the report is projected. 5. Reconcile ending cash balance as above. 6. Compare projected to historical cash flows for reasonability. What do you do with it once you have it? A cash flow statement is one valuable tool in a manager’s toolbox. Lenders are especially interested in Cash Flow Statements because documentation based on solid information reduces the bank’s lending risk. Lower lending risk typically equals more willingness to lend, as well as a lower interest rate. Most importantly, a manager can help control his financial activity by referring to the cash flow statement. L5.3
    • The Cash Flow Statement Lesson Plan I. Purposes A. To teach the purpose and use of cash flow reports. B. To teach the process of building a cash flow report. II. Highlights/ descriptions A. What is a cash flow report? - Indicates the source of cash inflows and the destination of cash outflows, as well as the timing (by month), within a specified range of time (accounting cycle.) - Can be historical or projected. - Reconciles beginning and ending cash balances. B. The process of building an historical cash flow report begins with the transaction log. There are totals representing each account by month. These totals are to be recorded on the cash flow worksheets. Totals on the worksheets will then be taken to the actual cash flow report. C. What is it telling me? - When and from where the operation received cash. - How and when the cash was spent. Historical cash flow reports are structured like an income statement with accounts listed vertically on the left side of the page. Months are listed across the top. At the bottom, there is a reconciliation showing the beginning cash balance, the net cash increase or decrease, and ending cash balance. Historical cash flow reports are the starting point to building projected cash flow reports. D. Projected cash flow reports are based on history or other knowledge and help paint a picture of when an operation will have sufficient cash to cover expenditures. They can also indicate when an operation is likely to fall short. Producers can plan for shortages by knowing L5.4
    • ahead of time when cash is likely to be short. Likewise, lenders who are given plans based on history and other specified data view an operation as less risky- they are more willing to lend to less risky, carefully planned operations. E. Steps to building an historical cash flow report: Step 1. Record daily cash transactions by enterprise in the transaction log. (Total each month.) Step 2. At the end of the year, total each enterprise by account (vertically). Step 3. Total each month (horizontally.) This figure will be a “check figure” so that calculation errors are minimized. Step 4. Record account totals by month to the Cash Flow Worksheet. Step 5. Total, by month, all cash transactions. Step 6. Record to final Cash Flow Report. Skip 3 lines between monthly data for calculating totals per account by month. Add the “check figures” by month from the transaction log and check it with the totals by month on the final cash flow report. Step 7. Check beginning and ending cash balances (usually checking account balances) to make sure they reconcile with report. Producers must reconcile checking accounts. Beginning and ending balances reflect the register balance, not the bank statement- outstanding checks and deposits are included in the cash flow reports, but may not be included in the bank statement. L5.5
    • F. Projected Cash Flow Reports indicate timing and placement of future cash transactions. Projected cash flow reports should be based on Enterprise Budgets and checked for reasonableness with historical cash flow reports. G. Steps to building a projected cash flow report: Step 1. Complete enterprise budgets. See the Enterprise Budgets section of this curriculum. Step 2. Record totals by month and by account to the Cash Flow Worksheet as above. Step 3. Adjust for new production practices, or other foreseeable changes. Step 4. Total and record results to the final Cash Flow Report, but specify in the title that the report is projected. Step 5. Reconcile ending cash balance as above. Step 6. Compare projected to historical cash flows for reasonability. III. Potential Speakers A. Extension Agents B. Extension Specialists IV. Review Questions A. True or False. The Cash Flow Statement provides information about the timing and nature of all cash inflows and outflows of a business. True. The Cash Flow Statement details the nature of cash inflows and outflows by account. Further, it summarizes by month each account’s transactions. L5.6
    • B. True or False. Cash Flow Statements can be either historical or projected. True. Managers should produce both historical and projected cash flow statements. C. Historical cash flow statements are derived from the _________________. Transaction Log. L5.7
    • Statement of Cash Flows Overheads Introduction √ The Cash Flow report indicates the source of cash inflows & the destination of cash outflows, as well as the timing (by month), within a specified range of time; it can be historical or projected. √ Cash is reconciled to the ending cash balance represented on the balance sheet. √ The Transaction Log is the source of data for the historical Cash Flow report. Data is accumulated by account and by month, then transferred to the Cash Flow report. √ Enterprise Budgets are the source of information for the projected Cash Flow report. √ Steps for building an historical Cash Flow report: 1. Record daily cash transactions by enterprise in the transaction log. (Total each month.) 2. At the end of the year, total each enterprise by account (vertically). 3. Total each month (horizontally.) This figure will be a “check figure” so that calculation errors are minimized. 4. Record account totals by month to the Cash Flow Worksheet. 5. Total, by month, all cash transactions. 6. Record to final Cash Flow Report. 7. Check beginning and ending cash balances (usually checking account balances) to make sure they reconcile with report. L5.8
    • √ Steps for building a projected Cash Flow report: 1. Complete enterprise budgets. See the Enterprise Budgets section of this curriculum. 2. Record totals by month and by account to the Cash Flow Worksheet as above. 3. Adjust for new production practices, or other foreseeable changes. 4. Total and record results to the final Cash Flow Report, but specify in the title that the report is projected. 5. Reconcile ending cash balance as above. 6. Compare projected to historical cash flows for reasonability. L5.9
    • Cash Flow Statement Case Application The Doe’s 2002 cash flow statement is shown below. The family began the year with $8,500 as shown on in the Beginning Cash Balance. They ended the year with $9,905 in their bank account. During the year, the total cash inflow was $34,569 of which $16,000 was Mrs. Doe’s salary from the school. Total cash outflow was $33,163. The cash flow statement details the monthly flow of cash in and out of the family business. There was no month where the family was short of cash. The farming business generates most of its income during the months from May to August when the operation is selling its vegetables. The cattle sales are scattered throughout the year. Major expense months for the farming operation occur in January, April, and September. The land payment and equipment note payments are due in January and September while many of the vegetable production expenses occur in April. The cash flow statement demonstrates that the farming operation does not generate enough income to overcome its expenses. The jeopardy is planning for the unexpected event, such as Mrs. Doe losing her job or major medical expenses due to an accident. Major purchases, such as equipment replacement, would have to be planned carefully. L5.10