6 Recommendations for a Better Cash Flow

Grant Wiese
Apr 13
5 min read

SW Financial Literacy

"This Cash Flow is Trash"

6 Recommendations for a Better Cash Flow

I was recently talking with an ag lender from a competing financial institution. We got onto the subject of cash flow statements and quickly came to an agreement that most cash flow statements created are trash.

Why Are Cash Flows Used?

Cash flows are created for a number of different reasons.

Many producers will create one to help them with their grain marketing and finding breakevens. This is great in theory, but worthless information if you are not executing on your own marketing strategy, (which most people don’t do) or having up-to-date yield estimates and updated expenses with actuals. The few farmers who actually create a grain marketing plan regularly are taking the steps needed to properly utilize a cash flow statement for grain marketing decisions past the month of January.
Sometimes a cash flow is needed for a financial institution. This could be for a new purchase or an operating renewal. Nearly every one of these statements handed in shows positive repayment capacity, because the farmer wants to get approved for the loan and assumes that’s what the lender wants. It is hard to build trust with a cash flow statement that is showing positive returns for the upcoming year when historical losses are deep and obvious through a balance sheet trend.
Almost everyone creates an income and expense report, another version of a cash flow, for tax purposes. These will cover a tax year and not show actual expenses and earnings for a crop cycle. In doing it just for a tax year, we have income flowing in from a previous year and expenses for the next year all in the same statement. While eventually these types of income and expense reports or cash flow statements will average out to a somewhat accurate depiction of the operation, it is still only slightly helpful when you’re looking at a long-term average. We still have goofy things like accelerated depreciation, which skew the numbers and don’t show reality in your bank account.
Another big chunk of cash flows are used to help with farm decision-making, but they are done wrong. These often show unrealistic commodity price sale averages which may never come to fruition. It is also common to see industry-wide averages for expenses, possibly pulled from dated university research. Very little about these statements is accurate to the operation this cash flow was built for.

Very rarely do we ever come across cash flow statements that have been done correctly and are actually helpful to the operator with their financial decision-making throughout the year.

How can an accurate cash flow statement help you?

You can make an accurate and realistic grain marketing plan at the start of the year, making adjustments to execute on changes to yield potential and the markets throughout the year.
You can understand where your financials and cash position are headed on your balance sheet midseason. Having a good idea of if you’ll be profitable in December while it is still August is extremely helpful when you are approached to buy ground in September. You know if your operation is heading in the right direction before you update your balance sheet and bank statements with your lender and accountant at the end of the year. You can make educated decisions while others are guessing.
You can spot expense trends. By tracking accurate statements year over year, you can quickly see where expenses are getting out of hand or maybe inflated compared to historical figures. This will help you spot weaknesses in your operation and find out where you can become more efficient.
Flow of funds. For those that run tight on operating funds midyear or potentially will need additional funding, keeping track of the expenses paid and expenses yet to come will help you manage your money, sell grain potentially sooner in the cycle to avoid a cash crunch, or know when to request additional funds from your banker.

Typically, the greatest tell if a cash flow has any type of accuracy is when we see a breakdown of price by product type (like all chemicals and fertilizer) and by field or on a per-acre basis.

These operators know their expenses to a penny and can start to calculate a breakeven by field. This allows for them to know exactly how much they’re able to profit on a per-field basis, which helps them when they are needing to take out additional loans to upgrade equipment, negotiate rent, or consider making a new land purchase. Operators who keep these up to date on at least a monthly basis tend to perform the best financially.

So what are my recommendations for a cash flow statement?

Here are the top 6 things you should be doing with your cash flow statement every year:

You 100% should be doing one. Anything that is tracked, you will do better at. If you track your calories consumed and daily fitness, you have a better chance of losing weight. If you keep track of birthdays on the calendar, you have a better chance of remembering to reach out to friends and family on that date. If you are tracking your favorite sports team, you tend to know how their season is going. If you are accurately tracking expenses, you tend to save more and make more money.
Find a format that fits your style. Most cash flows I see are created in a custom-made Excel document. There are plenty of options out there, but find one that suits all of your needs.
Don’t let someone else do it for you. Don’t pay to have someone else build your cash flow for you using your numbers. If you don’t understand your own cash flow, you won’t use it to make the right decisions. You must do the work.
Create projections for the upcoming year based off your own operation’s historical information. Never use anyone else’s operation’s data to build your cash flow. This has to be yours.
Update actual expenses and cash grain sales next to your projections (at least monthly). If you start going over budget, ask the question, Why? Was my projection unrealistic? Did I book too much? Should I have locked prices in sooner? Am I being taken advantage of? Do I need to check with another provider? How can I get this lower in the future? How many more expenses will I have in this category? How far over budget am I going to run? Where can I reduce expenses elsewhere to make up for this excess loss?
Use your updated cash flow for decision-making. Having an unexpected large repair and are considering replacing the asset? See if your cash flow allows it. CPA wants you to buy a lot at the end of the year to avoid income tax? See if your cash flow allows it. You’ve been approached to add some high-rent acres? See if your cash flow allows it. There’s been a run-up in the market, but you’re waiting for five dollars? See if your cash flow allows it.