The second major set of questions a rancher must ask is: “Is my ranch generating a positive or negative cash flow?” In other words, “Is my business's financial structure such that I can meet the annual cash flow needs of my business (and family)?” You answer this question with a bottom-line summary entitled “earned-net-cash flow.”

Figure 2 presents a simplified earned-net-cash flow summary table. Starting with the same NCOI as you did in the profitability analysis, you subtract the debt principal payments. (Interest payments are in the operating expenses.) Family-living draw is also subtracted out, as are capital purchases.

Sales of capital assets are added back in, and income taxes and Social Security payments paid that year are subtracted out. (Remember, taxes paid lag by one year.) The remaining number is the earned-net-cash flow of the ranch business.

Capital assets may be financed by equity capital or borrowed capital, or some combination of the two. Family living may be financed from within the ranch business or from off-farm employment, or some combination of the two. How the ranch's capital assets, such as cows, machinery and equipment, and the family-living draw are financed makes a huge difference in earned-net-cash flow, as is the financial structure of the ranch business.

The earned-net returns summary and the earned-net-cash flow summary both start with the same NCOI summary number. But the similarity ends there.

Earned-net returns adjust the NCOI into an accrual-adjusted income statement. That is, NCOI is adjusted for inventory adjustments and depreciation.

The earned-net-cash flow account, on the other hand, adjusts the NCOI for capital expenditures, debt repayments, family-living draw and taxes paid.

The earned-net return summary and the earned-net-cash flow summary are both needed to properly assess business performance. Because of completely different adjustments, these simply are two different accounting summaries of the same ranch business. Without these two summaries, ranchers are being let down by their on-ranch accounting systems.

One final point. A ranch doesn't have to be profitable every year. It should, however, be profitable more years than not.

On the other hand, a ranch does have to cash flow every year. If it doesn't, you'll be visiting with your banker to borrow more money.

How you finance your ranch business and how you finance your family-living draw are two critical ingredients for managing the cash flow of your ranch business.

Figure 1: Earned-net returns from the ranch

	Operating Income			$_____________
Minus	Operating Expenses			$_____________
Equals		Net-Cash Operating Income		$_____________
Minus	Depreciation			$_____________
Plus or Minus	Inventory Change			$_____________
Equals			Net Ranch Income	$_____________
Earned net returns to unpaid family & operator labor, managment and equity capital

Figure 2: Earned-net-cash flow

	Operating income			$_____________
Minus	Operating expenses			$_____________
Equals		Net-cash operating income		$_____________
Minus	Dept principal paid			$_____________
Minus	Family-living draw			$_____________
Minus	Capital purchases			$_____________
Minus	Capital sales			$_____________
Plus	Income taxes & social security paid this year			$_____________
Equals			Earned-net-cash flow	$_____________

When I find a ranch family that doesn't separate the family-living draw in its accounting system, I immediately suspect family-living draw is a cash-flow weakness in that business. I'm rarely proven wrong.

Figure 3 illustrates my concern and focus on family-living draw. Our farm business management data shows North Dakota farmers and ranchers' family-living draw per farm is trending upward of $1,500/year. That means, on average, it takes the net-cash-flow from 15 more cows annually just to generate the increased family-living draw. That's 15 cows every single year!

Without annual family/business measurements, family-living draw can creep ahead of the business's ability to generate it. It's why so many farms and ranches today have someone working off the operation to generate a family living.
— Harlan Hughes

Click HERE to download Figure 1.