Analysis of Cash Flow
A primary advantage of cash flow analysis is that it provides an early-warning system for the business in terms of financial affairs. When major differences between projected and actual cash flow occur, the manager should complete a review of financial transactions and production practices to determine the reason for the difference.
The focal points for cash flow analysis are total cash receipts, total cash expenses, new debts, interest and principal payments, and cash balance. Projected amounts for each of these should be compared with actual experience at least on a monthly basis. Major differences between projected and actual cash flow may indicate the need for changes in crop or livestock production plans, planned new capital investment, or planned family living expenditures.
Caution must be exercised in using cash flow to evaluate the health of a farm business. Cash flow can only indicate if current returns will pay current expenses, debt, family living, and other current obligations included in the cash flow document. An analysis of the health of a farm business should include a review of the balance sheet and the income statement, as well as the cash flow.
Figure 3 is an annual cash flow projection. It indicates the expected sources of cash receipts and estimated cash expenses for the year. Principal payments and family living are included and a year-end cash balance is computed.