Cash operating income and liquidity management for dairy farms

Kansas Agricultural Experiment Station Research Reports, Dec 1995

Net cash flow measures the amount of cash remaining after all cash expense obligations are satisfied. This cash is available for additional farm investment, off-farm investment, family living, and additional debt repayment. A 5- year average monthly cash flow statement was used to determine net cash flow for 19 Kansas dairy farms. Results indicated that excess cash and debt were used primarily to invest in machinery, vehicles, and nonfarm assets and increase the allocation for family living. Investments in land and buildings increased moderately during the study period.; Dairy Day, 1995, Kansas State University, Manhattan, KS, 1995;

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Cash operating income and liquidity management for dairy farms

Cash operating income and liquidity management for dair y farms B.D. Elliott Michael R. Langemeier Allen M. Featherstone Follow this and additional works at: http://newprairiepress.org/kaesrr Part of the Dairy Science Commons Recommended Citation Elliott, B.D.; Langemeier, Michael R.; and Featherstone, Allen M. (1995) "Cash operating income and liquidity management for dairy farms," Kansas Agricultural Experiment Station Research Reports: Vol. 0: Iss. 2. https://doi.org/10.4148/2378-5977.3256 - Thi s report is brought to you for free and open access by New Prairie Press. It has been accepted for inclusion in Kansas Agricultural Experiment Station Research Reports by an authorized administrator of New Prairie Press. Copyright 1995 Kansas State University Agricultural Experiment Station and Cooperative Extension Service. Contents of this publication may be freely reproduced for educational purposes. All other rights reserved. Brand names appearing in this publication are for product identification purposes only. K-State Research and Extension is an equal opportunity provider and employer. Cash operating income and liquidity management for dairy farms Abstract Net cash flow measures the amount of cash remaining after all cash expense obligations are satisfied. Thi s cash is available for additional farm investment, off-farm investment, family living, and additional debt repayment. A 5- year average monthly cash flow statement was used to determine net cash flow for 19 Kansas dairy farms. Results indicated that excess cash and debt were used primarily to invest in machinery, vehicles, and nonfarm assets and increase the allocation for family living. Investments in land and buildings increased moderately during the study period.; Dairy Day, 1995, Kansas State University, Manhattan, KS, 1995; Creative Commons License Thi s work is licensed under a Creative Commons Attribution 4.0 License. Thi s Research Report article is available in Kansas Agricultural Experiment Station Research Reports: http://newprairiepress.org/ kaesrr/vol0/iss2/331 Summary Net cash flow measures the amount of cash remaining after all cash expense obligations are satisfied. This cash is available for additional farm investment, off-farm investment, family living, and additional debt repayment. A 5year average monthly cash flow statement was used to determine net cash flow for 19 Kansas dairy farms. Results indicated that excess cash and debt were used primarily to invest in machinery, vehicles, and nonfarm assets and increase the allocation for family living. Investments in land and buildings increased moderately during the study period. Words: Investment, Liquidity, Cash (Key Flow.) Introduction Liquidity and cash-flow management tools are essential components used in the implementation of financial control. Liquidity refers to the ability of the farm business to meet financial obligations as they come due and typically is measured using a cash-flow statement. Monthly cash-flow statements provide information necessary to assess seasonal credit requirements. Long-term cash-flow projections also can provide information pertaining to a firm's ability to repay intermediate and long-term loans. The objective of this study was to determine how excess cash profits (if present) 1Department of Agricultural Economics. were used on several Kansas dairy farms. Monthly sources and uses of funds are presented and discussed. Procedures Cash transactions, inventories, and production information for 19 dairy farms were available from the Financial Plus program of the Kansas Farm Management Association. To be included in the analysis, a farm had to be enrolled for 1988, 1989, 1990, 1991, and 1992. A monthly cash-flow statement was utilized to determine the amount of excess cash available for investment and debt repayment. This statement summarizes all cash transactions concerning the business or enterprise during a given period of time. The net cash-flow measure included on-farm sources and uses of cash as well as nonfarm cash flows. Cash operating income, defined as the amount of cash income from the farm business, was used to measure both profitability and liquidity. This cash is used for discretionary purposes, such as meeting scheduled principal payments, on and off farm investment, and family living. Net loans are calculated as loans received minus loans repaid and reflect the level of debt repayment or lack thereof. A negative value for net loans indicates that producers were paying down their debt. Financial and production variables were analyzed to ascertain where excess cash was invested. Results and Discussion Table 1 presents a 5-year average monthly cash flow statement for the 19 dairy farms. The dairy farms were relatively profitable during the period, averaging $57,479 of net farm income (accrual basis) per year and $53,985 of cash operating income (cash basis) per year. Using Table 1, we can analyze the seasonality of the various revenue and expense items as well as the summary variables in the lower portion of the table. Farm expenses increased proportionally more than farm sources during December, resulting in a negative cash operating income. The largest monthly net cash flow occurred in January. The largest monthly principal payments occurred in May and October. Dairy producers took out the most loans in April and December. April and December were the months when net loans were most positive, indicating the accumulation of debt. However, dairy farms paid down loans by average of $1,894 per year, over the 5-year period. The data indicate that excess cash was used primarily to finance intermediate assets (Table 2). Table 2 is not a complete balance sheet but lists end-of-year balances for dairy farm assets. Dairy producers in this study increased their cash outlays for vehicles and equipment, whereas cash expenditures on buildings decreased. Breeding stock and nonfarm asset inventories increased appreciably during the period. Nonfarm asset inventory increased from $8,369 in 1988 to $17,204 in 1992 or 105.5%. The value of owned land increased by 14.4% during this period. The producers in this study also increased their allocation for family living by 62% during the period. Fluctuations in the values of current livestock and crop inventories can be misleading and may not indicate a change of production. These fluctuations can be caused by changes in the individual commodity prices. Production numbers such as average cows per year indicate that milk production was steady during the period. Cash-flow management is an essential component of effective financial control. Anticipating cash requirements alleviates last minute decisions that are potentially costly. In addition, understanding the seasonal need of cash generation will allow producers to make better investment decisions. 470 5,673 384 3,271 3,432 2,779 2,271 657 4,970 23,907 3,204 27,111 3,880 4,126 (246) 3,126 (511) 17.8 1Numbers in parentheses represent negative values. 15,822 74,765 5,715 26,299 35,427 35,992 26,293 21,868 51,910 294,089 55,754 349,845 64,165 66,059 (1,894) 53,985 278 25.0 1Numbers in parentheses represent negative values. Item Current assets Cash and accounts receivable Feeder livestock Stored grains Supplies Intermediate assets Dairy breeding stock Other breeding stock Vehicles and equipmenta Long-term assets Buildingsa Land Current loans Intermediate loans Long-term loans Family living expenseb Nonfarm assets Nonfarm loans 1988 1989 1990 1991 1992 ---------------------------- $ ---------------------------44,728 50,831 52,979 55,017 59,642 17,059 22,868 25,936 24,554 22,653 48,429 51,476 57,481 45,324 61,221 1,365 2,408 3,467 1,772 4,134 aCash expenditure. bData were not available for all farms.


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B.D. Elliott, Michael R. Langemeier, Allen M. Featherstone. Cash operating income and liquidity management for dairy farms, Kansas Agricultural Experiment Station Research Reports, 1995,