Financial Management: Cash Flow or Profit?

January 29, 2013 07:52 PM

Forecast for change in net cash income is good, profits better

Which is better for the farmer: good cash flow and low profitability, or good profitability and tight cash flow?

Keep in mind, it’s cash that pays the bills in a farm business, not profits, says Jim Nolen, distinguished senior lecturer in the Department of Finance of the McCombs School of Business at The University of Texas at Austin. "Cash flow can be sub-stantially different than profits, depending on the working capital management and capital-intensive nature of the business," he says.

One of the value drivers of a farm is the amount and timing of cash flows. Sometimes cash-flow expenses will be high, such as at planting. Attention to cash flow for planning and savings is critical.

If you are profitable, you will see this in net worth. You may have good cash flow from month to month, but low profitability. Some examples:

  • Living off inventories or depreciation and not reinvesting in the farm;
  • Off-farm jobs to reduce need for family living withdrawals;
  • Borrowing money and not paying bills.

As a farm manager, your must anti-cipate cash-flow needs and monitor profitability for each enterprise and across the farm at least annually.

Although 2012 average net cash income (NCI) for all farm businesses is expected to stay near the 2011 level, many farms will experience large changes, according to USDA. Farms that specialize in mixed grains, wheat, soybeans and peanuts are expected to see a 24% to 28% rise
in average NCI due to strong grain prices and insurance indemnities.

Beef businesses are forecast to have a 12% increase in NCI, while declining hog and milk prices and increasing feed expenses create a 16% decline in NCI for hog farms and a 51% decline for dairies.

p50 Cash Flow of Profit Chart


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