Statement of cash flows
The statement of cash flows examines how cash has entered and left your financial life during the year.
We need cash to flow into our lives so it is available to cover our family living, to pay our taxes, to service our debt, and to make investments in our business and personal lives.
Cash flow and net profit are not the same thing. You could have sufficient profits but insufficient cash flow. Or, your cash flow could be adequate but profits are lacking. A complete set of financial statements and proper analysis of them will show financial strengths and weaknesses.
The statement of cash flows begins by showing the beginning cash balance (farm and non-farm). This is the cash and account balances that are shown on the balance sheet from the beginning of the year.
Creating a statement of cash flows
The statement of cash flows is divided into three groups, each examining a different source of and use for cash: cash from operating activities, cash from investing activities and cash from financing activities.
1. Cash from operating activities
Cash from operating activities is cash that came into your life from farm income and from non-farm income.
The cash also leaves your life as you pay farm expenses. Family living takes cash out as does income tax and social security tax. These sources and uses are added to produce cash from operations. If earnings (farm and non-farm) bring in more cash than what went out for living and taxes, then cash from operations will be a positive number (desirable). If more cash left than came in, then this will be a negative number (not desirable).
2. Cash from investing activities
Cash is generated by the sale of assets (farm and non-farm) and is used in the purchase of assets (farm and non-farm). These sources and uses are totaled to produce cash from investing activities. If this total is a positive number, it is contributing cash. If it is a negative number, it is using cash.
It is quite common for this cash from investing activities to be a negative figure for farmers because of the nature of the farming business. The farmer must invest in assets which are expensive and usually by the time they are sold, many are old or obsolete with little value.
3. Cash from financing activities
Cash is generated by borrowing money and is used in the repayment of principal (the interest portion is an operating expense and has already been counted in the operating farm expenses). Also, cash inflows from gifts and inheritances received and outflows from gifts given are accounted for in financing activities.
These sources and uses are totaled to produce cash from financing activities. This figure may be positive or negative, depending on whether you borrowed more funds than repaid or repaid more than was borrowed, and whether you received more gifts and inheritances than were given.
Net change in cash balance
The cash from operating activities, cash from investing activities and cash from financing activities are then totaled to produce the net change in cash balance.
The net change in cash balance is added to the beginning cash balance to produce the ending cash balance. This number will be the same as the cash and account balance shown on the farmer’s balance sheet at the end of the year.
What you can you learn from a statement of cash flows?
The statement of cash flows is an interesting statement and can identify a number of things happening in your financial life.
Perhaps the cash generated from the operating part of your life was sufficient to fund some investing and also reduce some debt financing (this would be good).
Perhaps the operating portion contributed cash but the financing cash had to increase to fund the investments made during the year (this may be satisfactory, as long as things stay in appropriate balance).
Another scenario (not a good one) would be that the operating portion of your life was not sufficient to cover the living and taxes so debt financing was needed to fund the rest of it, plus any investments made during the year.
Perhaps you might find that the assets investments are being sold off to fund the shortages in the operating portion of their life and/or to reduce debt (this would not be good).
Reviewed in 2018