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Farming businesses: Do you know where your cash goes?

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There are many sayings about managing cash in a business – “cash is king” and “turnover is vanity; profit is sanity; cash is reality” to name but two. With many farms and estates diversifying their businesses, how can you be sure which part of the business is contributing to the cash inflow?

With many different enterprises now making up a modern farming business, it’s important to understand how all of the component parts work together. What’s generating cash? Should we be doing more of it? What should we stop doing?

I’ve started to look at this with some clients, using a “source and application of funds” statement to do a simple analysis. It’s a long-established format, which used to form part of statutory company accounts many years ago. (Unfortunately I can still just about remember that!)

How much cash has been generated?
To determine the cash generated, start with the profit statement, then adjust non-cash items and adjust for movements in working capital – stock, debtors and creditors.

Where has cash been spent?
Next, reconcile the movement in the opening and closing bank balance for the period and identify where the cash has been spent – capital investment, loan repayments, tax and drawings, as well as any new funding coming into the business such as new loans, new hire purchase agreements, or capital introduced.

How to use the statement
The statement is historical, telling you what has happened in the business. This will help you to take management decisions to influence what happens in the future. You can also use it to project what will happen if changes are made to the business and plot what happens to the cash position.

The example below looks at the business as a whole. Of course, for it to be really useful, you need to split this down across the different enterprises.

With businesses needing to become more sophisticated in a changing landscape, a few management tools should help you truly understand what’s happening in your business and how you can make it better.

Need help?
For more information on how we can help, please speak to your usual  Larking Gowen contact.
Call 0330 024 0888 or email

Steve Rudd

Example of source and application of funds statement    
How much cash has been generated?   £
Profit from accounts    100,000
Non-cash items eg. depreciation   10,000
Cash generated from trading   110,000
Working capital movements    
Increase in stock (5,000)  
Decrease in trade debtors 5,000  
Decrease in trade creditors 7,000  
Total cash generated   103,000
Where has cash been spent?    
Opening cash balance   14,000
Cash generated from trading   110,000
Cash generated from working capital movement   (7,000)
Fixed asset additions   (95,000)
Bank loan repaid   (10,000)
New lending taken   75,000
Drawings   (70,000)
Tax   (12,000)
Closing bank balance   5,000
Cash generated and new lending   178,000
Cash spent   (187,000)
Movement in cash position   (9,000)



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Larking Gowen

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