Where did the money go?

“Where did the money go?”  is an important question that faces farmers (and all people) at the end of each year.  There is a lot of cash flowing on farms.  It comes from a number of sources and it gets used in many different ways.  At the end of the year it can be difficult to understand ‘where did the money go?’  If you borrow money, your lender needs to know the answer.  If you don’t borrow money, nobody is forcing you to provide that information.  This little table may help you to understand the path of money on your farm.  Knowing where the money went last year can help you to steer your farm in the coming year.  Pat Mahon, with Ireland’s extension, shared this with me while I was on a sabbatical study leave.

  Cash coming in Cash going out
  What $ amount What $ amount
Operations Farm sales   Farm expenses  
Assets Assets sold   Assets bought  
Debt New loans   Principal paid  
Family Off-farm income   Family living expense  
Total Total Cash Available   Total Cash Used  

 

Cash Coming In.  There are four usual places where money comes from for a farm family (sources of cash).  Sales is the easiest to track- how much did you receive for the products you sold?  Maybe you sold some assets, capital sales, say the old tractor, a dairy cow, or maybe some land.  New loans are another source of cash, easily forgotten if you borrow from a machinery dealer and never see a check.  Many farms have off-farm income- someone working off the farm, or maybe another business.  Families must decide whether to use off-farm income for farming purposes, or to keep it separate from farm money.  Two check books is an easy way to keep them separated.  Have a farm check book, and a second one for the family.  Have the farm write a check to the family checkbook, or transfer the money by phone or on-line.  Then use the farm checkbook for farm expenses, and the family checkbook for groceries, and other family expenses.

Cash Going Out.  There are four usual places where money goes on a farm (uses of cash).  Farm expenses are the easiest to track- what did you pay for seed, feed, fuel, and property taxes?  There may also be capital purchases, replacing a mower, buying livestock, or land.  Paying principal on loans is another use of cash.  On most farms, there is a goal of having the farm contribute cash to family living needs.  However, some families do not expect the farm to contribute to family living; they figure that if the farm can ‘support itself,’ off-farm income will support the family.  What are your expectations for the farm?

Ideally ‘Total Cash Available’ will equal ‘Total Cash Used.’  In order to make it balance, you must add the beginning and end of year checkbook balances.  If you take money from, or add money to, a savings account, that must also be added.  Income taxes and health insurance would be included in Family Living.  Trying to get this to exactly balance the first year can be a challenge, and is probably not worth the headache.  But, putting some numbers in the table can give you a better sense of Where Did the Money Go?

Is this where you would like to see the money go next year?  Does this meet your goals?  What can you do to make it different next time?

Advertisements

About Dennis Kauppila

I work with farmers on finances. I started with UVM Extension in 1983, and have worked with hundreds of farmers on issues ranging from starting a farm, how to get a loan, leasing a farm, understanding farm finances, to retiring from farming. I teach 1 or 2 courses for farmers each winter. I am working with several farmers now on business plans, and I continue to work with many farmers on balance sheets and budgeting.
This entry was posted in Financial Mgmt. Bookmark the permalink.