Risk Management Cash Flow Projection For Operating Loan .

E-519RM5-7.002-09Risk ManagementCash Flow Projection for OperatingLoan DeterminationDanny Klinefelter and Dean McCorkle*A cash flow statement can be simply described as a record of the dollars coming in andthe dollars going out of a business. It showswhere the money comes from (the inflow ofcash) and where the money goes (the outflow ofcash).Actual and Projected Cash FlowA record of cash inflow and outflow that hasalready occurred in a business is an actual orhistorical cash flow. An estimate or forecast ofcash inflow and outflow into some future period is a cash flow projection. The actual cashflow of a business provides important information for making a cash flow projection into thefuture. The cash flow projection reveals thecash generating ability and the cash requirements of a business and it indicates the timingof both.Total Business and PartialBusiness Cash FlowA cash flow can be set up for the entire farmbusiness (including family living expenses andnonfarm income) or it can be set up to studyonly the business or 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 be used to considerthe cash inflow and outflow effect of a proposed investment or change in the business.Long-Run Profitability vs.Short-Run FeasibilityTwo management questions that need to bestudied in regard to proposed business changesare long-run profitability and short-run feasibility.Long-run profitability refers to a period of 5 yearsor more and is usually studied through the use ofprojected 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. It is usually studiedthrough the use of a projected cash flow. The CashFlow Projection form in this leaflet can be used tostudy the short-run feasibility of a business change.It has been designed specifically to project theoperating loan balance of a farm business for eachmonthly period.Preparing a Cash Flow ProjectionInformation for preparing a cash flow projectionmay 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 designedto be used on a monthly basis.The “Annual Estimate” column is frequentlyfilled in first. Then the annual estimate is allocatedto the various months or periods. Directions forarriving at the “Total Cash Inflow,” “Total CashOutflow,” “Net Cash Flow” and “Projected Operating Loan Balance” are given on the form.*Professor and Extension Economist and Extension Program Specialist–EconomicAccountability, The Texas A&M System.

CASH FLOW PROJECTION FORName Address DateAnnualEstimateJan.Feb.Mar.CASH INFLOW ITEMS1 Livestock: Background Cattle2Market Hogs-Sows3 Crops:Wheat4Grain Sorghum56 Distributions from cooperatives7 Agricultural program payments8 Commodity credit loans9 Crop insurance proceeds10 Custom hire11 Other farm income, gas refunds, etc.12 TOTAL FARM CASH INFLOW (Add lines 1 - 11)13 Non-farm business income and wages14 Non-farm dividends and interest15 Gifts, inheritance and other non-farm income16 TOTAL CASH INFLOW (Except Loans) (Add lines 12 - 15)CASH OUTFLOW ITEMS17 Breeding fees, livestock marketing, and other livestock expense18 Chemicals—herbicides, insecticides, etc.19 Conservation expense20 Custom hire, trucking, freight, lease21 Feed purchased22 Fertilizer, lime23 Gasoline, fuel, oil24 General farm insurance25 1Interest26 Labor hired27 Cash farm rent28 Repairs, maintenance, other machinery expense29 Seeds, plants purchased, other crop expense30 Storage, warehousing31 Supplies purchased, general32 Real and personal taxes33 Utilities34 Veterinary fees, medicine35 Auto expenses36 Other farm expenses—Farm organization fees, publications, etc.144,200191,20052,5002,70037 TOTAL FARM CASH OPERATING EXPENSES (Add lines 17 - 36)38 Livestock purchases39 1Machinery, equipment (cash payments, principal)40 1Buildings (cash payments, principal)41 1Land purchases (cash payments, principal)42 TOTAL FARM CASH OUTFLOW (Add lines 37 - 41)43 Family living 034,3002,5008,3002,50044State income tax1,1001,10045Federal income tax and social security5,0005,00046Non-farm business expenses30047Other non-farm and family cash outflow400TOTAL CASH OUTFLOW (Lines 42 - 47)48 (Except Operating Loan s)249NET CASH FLOW ( or -) (Line 16 minus line 48)(Except Loan Receipts and Operating Loan Payments)3501, 2, 3PROJECTED OPERATING LOAN BALANCE(Operating Loan Carried Over From Last Period 100,000)See last page.

OPERATING LOAN ctualCash FlowESTIMATED TOTAL CASH D TOTAL CASH 05,40098,50095,50050

(line 50), leaving a March projected surplus of 19,950 (line 50). If the net cash flow for a monthis greater than the projected operating loan balance for the previous month, the difference canbe labeled surplus.The projected operating loan balances (line50) for each month can be used as a guide inprojecting the approximate amount of loanfunds needed and the timing of the loan fundneeds.Interpretation of a CashFlow ProjectionTo illustrate the use of the Cash Flow Projection form, a sample set of figures has beenrecorded on the form.In the example, line 16 shows the total cashinflow (not including loan receipts) and line 48shows the total cash outflow (not including operating loan payments). Net cash flow is the difference between cash inflow and cash outflowand is shown on line 49 for the annual estimateand for each monthly period.If the cash inflow for the period is greaterthan the cash outflow for the period, the netcash flow is positive. If the opposite is true, thenet cash flow is negative. For example, the January projected total cash inflow of 7,100 (line16) is less than the total cash outflow of 10,200(line 48) so the net cash flow for January is- 3,100 (line 49). In March, the total cash inflowof 126,600 (line 16) is greater than the total cashoutflow of 10,800 (line 48), leaving a net cashflow of 115,800 (line 49).The projected operating loan balance for eachmonth is calculated on line 50. The operatingloan carried over from the last period shouldbe written in the appropriate space after thecaption on line 50. In the example, the operatingloan carried over from the previous Decemberis 100,000. For each monthly period, the projected operating loan balance is determined bycombining the previous balance with line 49 netcash flow for that period. A negative cash flowfigure for a month increases the operating loanbalance so it is added to the previous projectedoperating loan balance to determine the projected operating loan balance for that period. Forexample, the January net cash flow of - 3,100 iscombined with the 100,000 operating loan carried over from the previous December to arriveat a January projected operating loan balance of 103,100.A positive net cash flow for a month reducesthe previous month’s projected operating loanbalance. For example, the March net cash flow of 115,800 (line 49) is subtracted from the February projected operating loan balance of 96,250What Will a Cash FlowProjection DoAs farm businesses grow and as larger quantities of cash are needed, a cash flow projectionbecomes a more essential tool in the financialmanagement of farm businesses. A cash flowprojection gives the farm operator a basisfor studying the financing of the business. Itindicates how much needs to be borrowed andwhen it is needed.A cash flow projection provides for “control”of the business. By comparing the projectedcash flow to the actual cash flow that occurs, thevariance of each item can be noted. If receiptsare less than expected or expenses more thanexpected, the cash flow will alert the managerto a possible problem.A cash flow projection helps in planningadditional investments in the farm business.To be sound, an investment must be profitablein the long run. It must also be able to generateenough cash to make the payments on principaland interest.A cash flow projection is also a great tool forconsidering “what if” scenarios and conductingsensitivity analysis. At a minimum, producersshould consider best case scenarios in additionto the expected or most likely situation. It is oneof the most important financial tools in managing risk.Table End Notes14Principal payments on all loans not a part ofthis operating budget go on lines 39-41 Allinterest goes on line 25.

2Add negative “Net Cash Flow” figures of eachperiod to “Projected Operating Loan Balance”of previous period to arrive at “ProjectedOperating Loan Balance” for each period.Similarly, subtract positive “Net Cash Flow”figures from “Projected Operating LoanBalance” of previous period.3The purpose of line 50 is to provide informationfor estimating the amount of operatingborrowings needed in each period. The cashinflow and outflow items above do not includereceipt or payment of operating loans. NOTE: Tocalculate the net cash flow for the farm businessalone, subtract line 42 from line l2.Partial funding support has been provided by theTexas Corn Producers, Texas Farm Bureau, andCotton Inc.–Texas State Support Committee.Produced by AgriLife Communications, The Texas A&M SystemExtension publications can be found on the Web at: http://AgriLifeBookstore.org.Visit Texas AgriLife Extension Service at http://AgriLifeExtension.tamu.edu.Educational programs of the Texas AgriLife Extension Service are open to all people 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 May8, 1914, as amended, and June 30, 1914, in cooperation with the United States Department of Agriculture. Edward G.Smith, Director, Texas AgriLife Extension Service, The Texas A&M System.5

The cash flow projection reveals the cash generating ability and the cash require-ments 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 the entire farm business (including family living expenses and nonfarm income