Managing Cash Flow for Your Farm

Cash flow statements are very useful – they may very well be the first place where a farmer will spot a trend in business performance that may benefit or harm the operation in the long run. Cash flow statements show the business’s liquidity, the ability to pay expenses as they come due.

In accounting, there are both active statements and reflective statements.

Active Statements

The cash flow statement, a record of the dollars that came into and went out of the farm, is considered an “active” statement because it is completed multiple times throughout the year. The cash flow statement should be regularly compared to projected cash flow budgets, estimated cash in-flows and out-flows that will occur in the business in an upcoming period. This helps the farm manager to identify how the cash in-flows and out-flows that were expected differed from or mirrored what actually occurred.

Reflective Statements

In comparison to the cash flow statement, the balance sheet and the income statement are “reflective” statements because they are completed on one particular day of the year in which the farm manager is able to see how the business has progressed. With careful management of cash, the farmer has power over his or her business dealings. Business owners and agricultural producers in particular need to take time to document all sources and uses of cash within a business to keep their “finger on the pulse” of their operation.

Updating Cash Flow Statements

To be effective, farmers should regularly update their cash flow statements. What does “regularly” mean? The answer to this question varies based on whether you have a very seasonal operation (such as selling Christmas trees) or a business that receives cash throughout the year (such as a dairy farm). It is recommended that new financial managers begin with a cash flow statement that has monthly intervals. Although there is a bit of work keeping the statement current, having monthly statements provides an early warning of cash deficits or surpluses. By using the cash flow statement and the cash flow budget the farmer can make well informed management decisions such as when to purchase new equipment, or when to open a line of credit to cover cash deficit periods.


After keeping track on a monthly basis for a while, you may find that quarterly or six-month cash flow statements and budgets meet your need because the funds don’t change that much month-to-month. On the other hand, if you grow and direct market fresh vegetables for example, you may need to use a weekly cash flow statement through the summer, because of fluctuations in the variety of produce sold and the demand for each item throughout the growing season.


Cash flow statements and budgets can be created for the entire farm operation or for a specific enterprise, or profit center on the farm. For example, a dairy farm might have several enterprises in addition to dairy production, such as custom work, hay sales, and maple syrup production. Analyzing a specific enterprise allows the farm manager to determine whether an enterprise costs more than it generates in revenue. An enterprise budget helps the farm manager determine whether a new enterprise might be feasible.

Article adapted from Farm $en$e©, Farm Management Tools for Financial Success.

Farm $en$e© farm financial management courses are offered every fall and winter in multiple locations in Pennsylvania. Contact Juliette Enfield or Miguel Saviroff  for more information.
The Farm $en$e© text will be available for purchase through Penn State Agricultural Publications in November 2016.

Contact Information

Juliette Enfield

Extension Educator

Email: jse15@psu.edu

Phone: 814-563-9388

Miguel Antonio Saviroff, MS

Extension Educator

Email: mas60@psu.edu

Phone: 814-445-8911 x144

Farm$en$e: Farm Management tools for Financial Success

Are you looking for a farm business management class to help brush up your financial and production planning skills?  Penn State Extension’s Agricultural Entrepreneurship Team will offer Farm$en$e across the state at various locations starting in December and running through early April.

Farm$en$e is a finance and production education class for Pennsylvania farm businesses.  Farming is a complex business.  The key to running a successful farm business is the ability to manage scarce financial resources and plan farm production accordingly.  This short course teaches participants how to organize and use financial records; develop and analyze financial statements; and make informed decisions regarding finances and production. The concepts covered promote better internal decisions for farm management and stronger relationships with external partners, such as lenders.  The adoption of farm records and the use of financial statements, such as the balance sheet, cash flow, and income statement significantly impact farm financial performance.  This course satisfies the requirements for borrowers of the Farm Service Agency, but is also available to borrowers and lenders of any private agricultural bank.

Farm$en$e will be offered in the following locations:

December 12^th, 17^th, 19th

The use of financial statements can significantly
impact a farm's financial performance. 

Somerset County

9:30 am to 2:30 pm

January 7^th, 21^st, 28^th

Blair County

9:30 am to 2:30 pm

January 9^th, 16^th, 23^rd, 30^th

Berks County

10:00 am to 2:00 pm

January 31^st, February 7^th, 21^st, 28^th

Lancaster County

10:00 am – 2:00 pm

February 3^rd, 10^th, 24^th

Mercer County

9:30 am – 2:30 pm

February 4^th, 11^th, 18^th

Crawford County

9:30 am – 2:30 pm

  

March 3^rd, 10^th, 17^th

Bradford County

9:30 am – 2:30 pm

March 7^th, 14^th, 21^st, 28^th

Cumberland County

10:00 am – 2:00 pm

March 21^st, 28^th, April 3^rd

Union County

9:30 am – 2:30 pm

Register online for the session in your area by clicking on the link above or by phone by calling Kathy Shaffer at 814-445-8911, ext. 7.  The cost of the program is $225 per participant, pre-registration is required for all those attending.  For more information contact Miguel Saviroff, mas60@psu.edu or 814-445-8911, ext. 144.

Farm Financial Analysis Tool Proves Useful in Analyzing Solvency and Liquidity

By Miguel Saviroff, Extension Educator, Somerset County

For a farmer, making economic decisions may be a stressful task if accounting records and financial statements are not available.  The use of spreadsheets and computerized financial records help farmers relax while making a plan. Penn State Extension Farm Management Educators have used FINPACK as one of the tools in training farmers to evaluate the farm’s financial position, explore alternatives, and make informed farm management decisions. There are, of course, other financial programs that can be purchased for this use.

Dave Van Pelt is fine tuning and monitoring his operation's current financial strategies. He used FINPACK to simulate expansion strategies and analyze the possible new challenges. “My experience with FINPACK was with dairy start-up strategies, it has helped me see the level of production needed to support a herd large enough to meet financial obligations,” said Van Pelt.

The road map of a farm financial analysis starts at the beginning of the year with a beginning balance sheet. Once this point of reference is set, a monthly cash flow is planned and compared with the actual at the end of each month. At the end of the year, the accounting cycle closes and an ending balance sheet is prepared. Both balance sheets are used to calculate inventory changes and a year-end analysis leads to an Income Statement. Financial performance can be assessed using three concepts: Profitability, Liquidity, and Solvency.

In the FINPACK program using the data entry mode, a complete listing of assets, liabilities, and ownership equity is fed into the system, and the program creates the beginning balance sheet. Assets and liabilities are listed as current, intermediate, and long term. The output section presents this balance sheet with assets in order of liquidity in one section, and liabilities and net worth in the other section, with the two sections "balancing."  Owner’s Equity (aka Net Worth) is the difference between the assets and the liabilities, and it should be more that 50% of total assets. For example, assume my total assets are worth $800,000 and my total liabilities are $320,000. My owner’s equity would be $480,000 ($800,000 - $320,000). Owner’s equity should increase between 2 consecutive balance sheets. An owner’s equity growth rate should be at least 6% annually. If the business does not grow it could be a sign of liquidity problems, such as an income decrease.

FINPACK provides a suite of tools that guide producers 
and ag professionals to sound financial decisions. 

Two financial ratios obtained from the balance sheets are found in the FINPACK output screen. They are the liquidity and the solvency ratios. The liquidity ratio states the ability of the farm to pay its short term obligations. The liquidity ratio is also known as the current ratio and is obtained by dividing current assets by current liabilities. For example, if your current assets are $20,000 and your current liabilities are $16,000, then your current ratio would be 1.25 ($20,000 / $16,000). We interpret this ratio as follows: you have $1.25 of current assets (cash, savings, etc.) for every $1.00 of obligations (i.e. loan payments, line of credit or accounts payable) you owe within the upcoming year. A ratio greater than 1.7 is “Strong”; a 1.7 to 1.1 would fall in the “Caution” range; and less than 1.1 would be “Vulnerable.” A “vulnerable” situation can have potential causes, such as a farm expansion, low returns and high costs, and rapid debt payments. Strategies to get out of this “liquidity crunch” include raising cash by partially liquidating (selling) non-current or non-essential assets or borrowing to meet the current liabilities. Restructuring current debt into non-current debt reduces current liabilities. Debt restructuring should not be the first alternative in trying to solve liquidity problems. Other alternatives may need to be tried to provide a faster infusion of capital.

The solvency ratio indicates the financial position of the farm, and whether the business can cover its total debts with its asset base. A business is “insolvent” if it has more debts than it has in assets. The Debt to Assets ratio measures a farm’s solvency and is calculated by dividing total liabilities by total assets. From the above example, my debt/asset ratio would be 40% ($320,000 / $800,000). This measure helps us compare our solvency to similar operations.

A Debt to Asset Ratio less than .3 (30% debt) should be comfortable; between .3 and .6 (30% to 60% debt) is a medium to heavy load; and over .6 (60% debt) becomes heavy and if high enough, impossible to service. Overcoming a poor solvency measure will depend on the cause. A new operation will be expected to have a poor solvency. It will require hard work, strong cash flow, and solid profitability over time. In general, selling unneeded assets and using the proceeds to pay down your debts, can work. Refraining to take on additional debt can possibly help. You will need to increase your asset base by reinvesting your profits in the operation or bringing in outside investors. Also important, is taking good care of the assets by preventative maintenance, so they will hold their value longer.

In my next blog article,  I will discuss cash flow, financial efficiency, repayment ability, and profitability, which are highly important areas when looking at the overall financial condition of an agribusiness.

For information on Farm Financial Management educational programs, or if you have questions on financial aspects of your farm business, contact Miguel Saviroff at Penn State Extension in Somerset County at 814-445-8911 extension 144.

Financial Management Invaluable for Farm Success

by Miguel Saviroff, Extension Educator, Somerset County

A farm business depends on its finances!  Financial management is as critical as the other components of the business, such as crop, labor, nutrient, and pest management.  Lenders expect farmers to manage the funds they lend to them, so a farmer-lender relationship is very important.  Credit institutions will rarely extend credit when there is no visible record of your past income or when a financial plan cannot be prepared to convience them of the ability to use funds efficiently and repay the loans.  Financial literacy and management are a must for anyone aspiring to be a successful farmer.

Miguel Saviroff leads a Farm$en$e workshop

The Farm$en$e program trains farm managers who receive financial assistance from the USDA Farm Service Agency.  The course is 25 hours spread over 4 days.  Making decisions on the farm is a daily activity, but buying land or equipment requires informed decisions and the use of financial statements.  The program covers the use of the balance sheet, a "snapshot" of the farm financial condition at a single point in time.  In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.  The accrual income statement is a summary of the revenues, and the expense associated with generating those revenues, during a production cycle.  The accrual concept applies directly to agriculture; farm managers in the program learn that changes in inventory are part of the farm revenues.  The cash flow budget statement allows producers to project cash flows for each month of the upcoming year; it is the best financial planning tool.  Participants are required to prepare these statements for their own farm.

The workshop is designed to teach farmers how to assess their financial strengths and weaknesses, to identify the specific goals of the farm, and how to prepare a production plan that outlines the changes required to improve profitability.  Enterprise budgets are used to better analyze short and long run fiscal impacts and evaluate profitability.  Managing risks like price, cost, and interest rates are considered in this plan.

Monitoring financial ratios can be useful to adjust operations throughout the year, rather than once a year.  Borrowers attending the program learn to calculate their farm's financial ratios obtaining them from the key financial statements.  The liquidity ratio measures the ability to pay bills when due, the solvency ratio indicates the amount of debt relative to equity, and the profitability ratio indicates the true financial performance of the business.  These ratios are applied to troubleshoot and fix financial and production problems.

As many beginning farmers, Orlo St. Clair, attendee of the program, lacked land, equipment, managerial experience and access to financial resources.  St. Clair started as a herd manager on a farm in Indiana County.  "I asked the owner if I could raise my own heifers, and he accepted," St. Clair said.  "I wanted to have a base to start with."

Orlo St. Clair and his girlfriend review some of his financial records

"Since I am a production guy, usually it is my sister helping me with the financial accounting, but now I enjoy planning my year's cash flow," said St. Clair, who milks 90 cows and crops 175 acres.  "Thanks to the Farm$en$e program, I am able to plan my goals, changes, and measure the impact on the net income due to these changes."

Penn State Extension and the FSA assist farmers in adopting the financial tools necessary to become active managers.  For more information about Farm$en$e, contact Miguel Saviroff at the Somerset Extension office at 814-445-8911 ext. 144.