Cash and profit are not the same thing

A farm can make a profit and still run out of money. It sounds wrong, but it happens all the time, because profit and cash measure different things.

Profit is what the year earned: income less costs, as your accountant works it out. Cash is the money actually in the bank, or how far into the overdraft you are.

Why they differ

Four things push them apart.

1. Timing. A sale counts in profit when it's made. It counts in cash when the money lands. Cattle sold in late June might be paid for in July, in the next financial year.
2. Depreciation. This is the cost of machinery and buildings spread over their working life. It lowers profit, but no cash goes out for it.
3. Loan principal. Principal is the part of a repayment that pays off the loan. It takes cash, but it isn't a cost in the profit.
4. Drawings and big purchases. Drawings are the family's living costs taken from the business. They, and money spent on a new ute or a block of land, leave the bank, but most of it isn't counted as a cost in that year's profit.

There's another one on livestock farms. If you build up numbers, you spend cash on feed and keep stock you'd otherwise sell. The accounts may count the extra stock as value on hand, but you can't pay bills with it.

Budget and cashflow: two jobs

A budget asks: will the year make a profit? A cashflow asks: when will the money move, and will the overdraft carry us between sales? You need both. Our guide to your first farm budget builds the budget. This course builds the cashflow.

Why the bank cares about cash

The bank has lent you money and wants it back. Profit tells it the farm is worth running. Cash tells it the repayments can be met, month by month. That's why the cashflow is one of the first things a credit officer reads.

From profit to cash

To go from a year's profit to the change in your bank balance:

• start with profit
• add back depreciation
• take off loan principal
• take off drawings
• take off spending on machinery, land or extra stock

If the answer is below zero, the bank balance went backwards, even though the farm made a profit.

Drawings are the line most first cashflows get wrong, because people guess. The household drawings calculator helps you put a real number on it.