Revised October 2023
Ag Decision Maker
extension.iastate.edu/agdm
File C3-14
Understanding
Cash Flow Analysis
A cash flow statement is one of the most important
financial statements for a project or business. The
statement can be as simple as a one page analysis or
may involve several schedules that feed information
into a central statement.
A cash flow statement is a listing of the flows of cash
into and out of the business or project. Think of it as
your checking account at the bank. Deposits are the
cash inflow and withdrawals (checks) are the cash
outflows. The balance in your checking account is
your net cash flow at a specific point in time.
A cash flow statement is a listing of cash flows
that occurred during the past accounting period.
A projection of future flows of cash is called a cash
flow budget. You can think of a cash flow budget as
a projection of the future deposits and withdrawals
to your checking account.
A cash flow statement is not only concerned with
the amount of the cash flows but also the timing
of the flows. Many cash flows are constructed with
multiple time periods. For example, it may list
monthly cash inflows and outflows over a year’s
time. It not only projects the cash balance remaining
at the end of the year but also the cash balance for
each month.
Working capital is an important part of a cash
flow analysis. It is defined as the amount of money
needed to facilitate business operations and
transactions, and is calculated as current assets (cash
or near cash assets) less current liabilities (liabilities
due during the upcoming accounting period).
Computing the amount of working capital gives
you a quick analysis of the liquidity of the business
over the future accounting period. If working capital
appears to be sufficient, developing a cash flow
budget may not be critical. But if working capital
appears to be insufficient, a cash flow budget may
highlight liquidity problems that may occur during
the coming year.
Most statements are constructed so that you can
identify each individual inflow or outflow item with
a place for a description of the item. Statements
like Decision Tool Cash Flow Budget (12 periods),
www.extension.iastate.edu/agdm/wholefarm/xls/
c3-14cashflowbudget12month.xlsx, provides a
flexible tool for simple cash flow projections. A more
comprehensive tool for a Farm Cash Flow (Decision
Tool), www.extension.iastate.edu/agdm/wholefarm/
xls/c3-15cashflowbudget.xlsx, is also available. A
more in-depth discussion of creating a cash flow
budget is Twelve Steps to Cash Flow Budgeting,
https://go.iastate.edu/AGDMC315.
Some cash flow budgets are constructed so that
you can monitor the accuracy of your projections.
These budgets allow you to make monthly cash
flow projections for the coming year and also
enter actual inflows and outflows as you progress
through the year. This will allow you to compare
your projections to your actual cash flows and make
adjustments to the projections for the remainder of
the year.
Reasons for Creating a Cash Flow Budget
Think of cash as the ingredient that makes the
business operate smoothly just as grease is the
ingredient that makes a machine function smoothly.
Without adequate cash, a business cannot function
because many of the transactions require cash to
complete them.
By creating a cash flow budget you can project
sources and applications of funds for the
upcoming time periods. You will identify any cash
deficit periods in advance so you can take corrective
actions now to alleviate the deficit. This may involve
shifting the timing of certain transactions. It may
also determine when money will be borrowed. If
borrowing is involved, it will also determine the
amount of cash that needs to be borrowed.
Page 2
Understanding Cash Flow Analysis
Example 1. Cash flow budget (by quarter of the year).
Cash inflow 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Beginning cash balance $5,000
Sale of crop products $50,000
Sale of livestock products 25,000
Government payments $10,000
Total inflow $30,000 $50,000 $10,000
Cash expenditures 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Seed $10,000
Fertilizer $20,000
Feed 10,000
Processing $10,000
Marketing $5,000
Capital purchases 10,000
Interest 5,000
Debt payments 10,000
Total expenditures $20,000 $30,000 $25,000 $5,000
Quarterly net cash flow $10,000 $20,000 –$25,000 $5,000
Cumulative net cash flow $10,000 $30,000 $5,000 $10,000
Periods of excess cash can also be identified. This
information can be used to direct excess cash into
interest bearing assets where additional revenue can
be generated or to scheduled loan payments.
Cash Flow is Not Profitability
People often mistakenly believe that a cash flow
statement will show the profitability of a business
or project. Although closely related, cash flow and
profitability are different. A cash flow statement lists
cash inflows and cash outflows while the income
statement lists income and expenses. A cash flow
statement shows liquidity while an income statement
shows profitability.
Many income items are also cash inflows. The sales
of crops and livestock are usually both income and
cash inflows. The timing is also usually the same
as long as a check is received and deposited in
your account at the time of the sale. Many expense
items are also cash outflow items. The purchase of
livestock feed (cash method of accounting) is both
an expense and a cash outflow item. The timing
is also the same if a check is written at the time of
purchase.
However, there are many cash items that are not
income and expense items, and vice versa. For
example, the purchase of a tractor is a cash outflow
if you pay cash at the time of purchase as shown in
the example in Table 1. If money is borrowed for the
purchase using a term loan, the down payment is a
cash outflow at the time of purchase and the annual
principal and interest payments are cash outflows
each year as shown in Table 2.
The tractor is a capital asset and has a life of more
than one year. It is included as an expense item in
an income statement by the amount it declines in
value due to wear and obsolescence. This is called
depreciation. The cost of depreciation is listed
every year. In Tables 1 and 2, a $70,000 tractor is
depreciated over seven years at the rate of $10,000
per year.
Depreciation calculated for income tax purposes can
be used. However, to more accurately calculate net
income, a realistic depreciation amount should be
used to approximate the actual decline in the value
of the machine during the year.
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Understanding Cash Flow Analysis
Table 1. Tractor purchase - no borrowing.
Purchase of a $70,000 tractor, no money borrowed,
depreciated over seven years.
Cash Outflow Expense
Current
Period
$70,000
Year 1 $10,000
Year 2 10,000
Year 3 10,000
Year 4 10,000
Year 5 10,000
Year 6 10,000
Year 7 10,000
Total $70,000 $70,000
Table 2. Tractor purchase - borrowing.
Purchase of a $70,000 tractor, $45,000 down payment,
$25,000 paid over five years, seven percent interest,
depreciated over seven years.
Cash Outflow Expense
Current
Period $45,000 $0
Year 1 $5,000 principal $10,000 depreciation
$1,750 interest $1,750 interest
Year 2 $5,000 principal $10,000 depreciation
$1,400 interest $1,400 interest
Year 3 $5,000 principal $10,000 depreciation
$1,050 interest $1,050 interest
Year 4 $5,000 principal $10,000 depreciation
$700 interest $700 interest
Year 5 $5,000 principal $10,000 depreciation
$350 interest $350 interest
Year 6 $0 $10,000 depreciation
Year 7 $0 $10,000 depreciation
Total $75,250 $75,250
In Table 2, where the purchase is financed, the
amount of interest paid on the loan is included as an
expense, along with depreciation, because interest
is the cost of borrowing money. However, principal
payments are not an expense but merely a cash
transfer between you and your lender.
Other Financial Statements
A cash flow statement is only one of several financial
statements that can be used to measure the financial
strength of a business. Other common statements
include the balance sheet or Net Worth Statement,
https://go.iastate.edu/AGDMC319, and the Income
Statement, https://go.iastate.edu/AGDMC324,
although there are several other statements that may
be included.
These statements fit together to form a
comprehensive financial picture of the business.
The balance sheet or net worth statement shows the
solvency of the business at a specific point in time.
Statements are often prepared at the beginning and
ending of the accounting period (i.e. January 1).
The statement records the assets of the business
and their value and the liabilities or financial claims
against the business, i.e. debts. The amount by
which assets exceed liabilities is the net worth of the
business. The net worth reflects the current value of
investment in the business by the owners.
The income statement is a dynamic statement that
records income and expenses over the accounting
period. The net income (loss) for the period
increases (decreases) the net worth of the business
(as shown in the ending balance sheet versus the
beginning balance sheet).
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Understanding Cash Flow Analysis
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provider. For the full non-discrimination
statement or accommodation inquiries, go to
www.extension.iastate.edu/diversity/ext.
Reviewed by Kelvin Leibold
extension field specialist, [email protected]
Original author, Don Hofstrand
retired extension agricultural business specialist
extension.iastate.edu/agdm
A complete set of Financial Statements (Decision
Tool), www.extension.iastate.edu/agdm/wholefarm/
xls/c3-56comprfinstatements.xlsx, including
the beginning and ending net worth statements,
the income statement, the cash flow statement,
the statement of owner equity and the financial
performance measures is available to do a
comprehensive financial analysis of your business.
To help you assess the financial health of your
business, Financial Performance Measures,
https://go.iastate.edu/AGDMC355, allows you to
give your business a check-up. Decision Tool,
Interpreting Financial Performance Measures,
www.extension.iastate.edu/agdm/wholefarm/xls/c3-
56interprfintrendsheet.xlsx, helps you to understand
what these performance measures mean for your
business.
Figure 1. Integrated financial statements.
Balance
Sheet
Balance
Sheet
Income Statement
Cash Flow Statement
Time
