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Cash Discrepancy Triggers

by | Aug 18, 2022

Key in the center of a maze

Doing a thorough, accurate evaluation of a customer’s past financial performance is key to feeling confident when reviewing credit requests.  However, in agriculture, the customer data received to perform this analysis is often incomplete.  Therefore, cash discrepancies can leave you scratching your head when completing a financial or Schedule F cash to accrual analysis.  Let’s look at cash discrepancies and what the culprit may be.

Cash Accuracy

What is the cash accuracy check telling us?  This indicates whether cash inflows equal cash outflows for the analysis period.  Meaning the analysis period’s beginning cash balance + all sources of cash = all uses of cash + ending cash balance for the analysis period.  With this in mind, let’s identify the potential sources of a positive and negative cash discrepancy.  In today’s post, we will focus on missing sources of cash that cause negative cash discrepancies.

Negative Cash Discrepancies

Negative cash discrepancies in the cash accuracy check indicate either the beginning cash balance is incorrect or a source of cash for the analysis period is missing.  Sources of cash include cash farm income, personal income, capital sales, money borrowed, cash gifts, and inheritances received.  Therefore, potential cash discrepancy triggers could include:

Missing Farm Income
Typically farm income is reported correctly. But there are a few potential culprits like missing cull livestock sales since these are not reported on the Schedule F. How about hedging accounts? Were there hedging profits received on closed contracts that have not been included in the analysis?
Missing Personal Cash Inflows
Does the producer or a spouse have non-farm sources of income? If so, has this been included in the analysis? This is especially important for sole proprietors and when using a consolidated balance sheet that includes personal assets and liabilities. Additionally, did the borrower receive any gifts or inheritances during the analysis period?
Missing Capital Sales
Were pieces of equipment sold during the period? This question should include outright asset sales and traded assets. It’s easy for an operator to disregard the sale of older equipment and other assets that were not being utilized in the operation. This is a source of cash for the operation during the analysis period though. Additionally, if assets were traded during the analysis period, consider what the borrower is reporting to you in terms of the new asset. If the full purchase price of the new asset is reflected in the analysis, the value received for the traded asset must be included as well.
Missing Money Borrowed
Were pieces of equipment sold during the period? This question should include outright asset sales and traded assets. It’s easy for an operator to disregard the sale of older equipment and other assets that were not being utilized in the operation. This is a source of cash for the operation during the analysis period though. Additionally, if assets were traded during the analysis period, consider what the borrower is reporting to you in terms of the new asset. If the full purchase price of the new asset is reflected in the analysis, the value received for the traded asset must be included as well.
Incorrect Beginning Cash Balance
Starting with the correct beginning cash balance is imperative in the analysis. The customer’s checkbook balance is to be used, not their deposit account balance(s). Their checkbook balance considers end-of-period transactions from the previous period. Oftentimes the producer’s actual checkbook balance is less than their deposit account balance. This is because of those “floating” checks written out for end-of-period expenses that have not yet cleared.

Summary

Cash discrepancy sleuthing is often challenging and can be a frustrating process.  Use the steps above as potential starting points when sleuthing negative cash discrepancies in FINPACK Financial Analysis (FINAN) or FINPACK Schedule F Cash to Accrual Analysis.  In these situations, the goal is to find the missing source of cash for the analysis period.

Look for our next post on sleuthing positive cash discrepancies in your financial analysis. And here are 5 of the top cash discrepancy triggers to consider. If you are at a loss and need help on where to begin when sleuthing cash discrepancies contact us for help.

Economist | 612-625-4219 | pvannurd@umn.edu | + posts

Pauline Van Nurden joined the FINPACK Team as an Economist in 2017.

Prior to joining the FINPACK Team, she worked as a lender. This provides her valuable industry experience and knowledge in her work with FINAPCK. Pauline holds a Master’s Degree in Agricultural Education and Bachelor’s Degree in Applied Economics, both from the University of Minnesota.

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