Cash flow statements are essential to run a farming business. There is a very good chance that they will be the first place where the farmer will spot a trend in business performance that could potentially benefit or harm the business in a long run. Cash flow statements are able to show the business's liquidity as well as the ability to pay expenses when they are due.
In accounting, there are active statements and reflective statements.
The cash flow statements - a record of cash coming in and out of the farm, is considered "active" statement as it is completed multiple times throughout the year. The cash flow statement should be regularly compared to forecasted cash flow budgets, estimated cash inflows and outflows that occur in the business in an upcoming period. This is vital as it helps the farm manager to identify if the expected cash in and cash out flows differed or mirrored what actually occurred.
The balance sheet and income statements on the other hand are "reflective" statements because they are completed on one particular day of the year where the farm manager is able to see how the business has progressed. By having good cash management, the farmer has power over his business dealings. It is vital for the owner to take time out to document all the sources and uses of cash within their business in order to keep their "finger on the pulse" of their operation.
Updating Cash Flow Statements
In order to be effective, farmers should update their cash flow statements regularly. How regular will depend very much on the nature of the business such as if you are running a seasonal business or a business that receives cash all year round, such as a dairy farm. It is encouraged that new financial managers begin with cash flow statements that has monthly intervals as they are helpful to provide early warnings of cash deficit or surplus. By being updated with the cash flow statements and cash flow budget, the farmer is able to make well informed decisions on when to purchase new equipment or when to open a line of credit when more cash is needed.
After keeping track of the cash flow statements on a monthly basis, you may find that quarterly or six month cash flow statements and budgets are able to meet your needs as the funds do not vary that much on a monthly basis. On the other hand, if you are running a business that has a wide range of fluctuation in terms of raw material, a weekly cash flow statement might be needed.
Cash flow statements are versatile in the sense that it can be created for the entire farm operation or a specific enterprise or profit center of the farm. Take a dairy farm for example, it may have several enterprises such as hay sales and maple syrup production. By having cash flow statements for each enterprise, the farmer is able to gauge whether each enterprise is performing well enough in order to justify continue running it.