Page 163 - DMGT521_PROJECT_MANAGEMENT

Project Management

Notes determine repayment schedules, and plan for short-term investments. This publication focuses
on preparing and using a projected cash flow statement in managing the farm business.
A projected cash flow statement is best defined as a listing of expected cash inflows and outflows
for an upcoming period (usually a year). Anticipated cash transactions are entered for the
subperiod they are expected to occur. The length of the subperiod depends upon whether a
monthly or quarterly cash flow statement is used. The word cash is crucial in this definition,
because only cash items are included in a cash flow statement.

Cash inflows include cash operating and capital receipts and can include nonfarm as well as
farm revenues. Cash outflows usually include such things as farm operating and capital outlays,
family living expenses, and loan payments. However, if the farming operation is completely
separate from the family, living expenses would not be included in the cash flow statement for
the farming operation. An example of such an arrangement would be a farm that is incorporated
and pays salaries to family members. Also included in the list of cash outlays are debt repayment
commitments, both principal and interest.
1. What Information is Provided?
Operating expenses are usually not paid evenly over the course of a year for many farm
enterprises. Also, marketing patterns for many farm products are not evenly distributed
throughout the year. Therefore, revenues usually do not flow into the business, and
expenses do not flow out of the business on an equal and regular basis during the year.
This results in periods of cash deficits and surpluses.
Knowledge of the amounts of cash deficits and surpluses and the timing and duration of
each aids tremendously in setting up a line of credit with a lender. The projected cash flow
statement clearly identifies when loan funds will be needed and when the lender can
expect to be repaid. This information is extremely useful in justifying loan requests,
especially during financially stressful times.

In addition, a projected cash flow statement enables the user to identify the amount and
duration of cash surpluses, which is useful when deciding among the various short-term
deposit instruments currently available to the investor (i.e., 3-month certificates, 6-month
money market certificates, money market funds, etc.).
Of course, the accuracy of the information provided by a projected cash flow statement
depends upon the accuracy of revenue and expense projections, the detail included in the
cash flow statement, and whether the statement is prepared for quarters, months, or even
weeks. Even though it may lack accuracy be cause of being an estimate, a projected cash
flow statement does provide a projection of expected cash deficits and surpluses, which
can be updated as the year progresses.
2. How is the Statement Organized?
Perhaps the best way to understand how a projected cash flow statement is organized is to
think in terms of a calendar, with the columns representing the subperiods for the planning
period used in the projection. Usually the planning period is one year, but the subperiods
can be as detailed as you desire. The subperiods can represent quarters, months, and even
weeks.

The rows represent various categories for the beginning cash balance, cash receipts, cash
expenses, borrowing, saving, and the ending cash balance. Of course, the beginning cash
balance for each subperiod is the ending cash balance for the previous subperiod.
A very simplified cash flow statement has been adapted from a statement developed by
Thomas L. Frey and Danny A. Klinefelter (Coordinated Financial Statements for Agriculture)
and is used to explain how a projected cash flow statement is organized (handout 1). The

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