The idea that positive cash flow somehow implies profitability is plainly wrong.
Cash flow gets a lot of prattle and positive press in agriculture. Most often it is considered a measure of liquidity. Perhaps more important it is a watermark for bankers because it shows, generally, that you will have the money to pay them what you owe when the payments are due.
However, a positive cash flow for your banker doesn't mean there will be anything left over for you.
"Bankers ultimately just want their money repaid. That's the world you live in," says Stan Bevers, Texas AgriLife economist at Vernon.
Further, using cash flow as a financial diagnostic tool is financially dangerous. Beef Producer columnist Walt Davis recently said, "Just because something will cash flow doesn't mean it's a good use of your money."
Ultimately, if you're just making cash flow you are just "surviving," Bevers says.
If you are truly accounting all your costs and have plenty of cash flow, plenty of working capital, and if your net worth is increasing, then you could argue that your positive cash flow is a sign of profitability. That, Bevers says, is "thriving."
Truth is, the way you do your accounting determines whether or not positive cash flow can serve as one sign of financial well-doing, Bevers suggests.
Here's the rub. Two of the three biggest ranch expenses are depreciation and labor. Labor includes family living expenses, Bevers says.
Depreciation exists whether you pay cash for things or not and whether or not you deduct it on your tax forms. It is a real cost because equipment wears out, as do cows, and must be replaced.
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