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How to Sleuth Positive Cash Discrepancy Triggers

by | Sep 1, 2022

Doing a thorough, accurate evaluation of a customer’s past performance is key to feeling confident when evaluating credit requests. Oftentimes in agriculture, the customer data received to perform this analysis is incomplete. Therefore, cash discrepancy errors can leave you scratching your head when completing a financial or Schedule F cash to accrual analysis. In our previous post on cash discrepancies, we focused on missing sources of cash that cause negative cash discrepancies. In today’s post, we will focus on missing sources of cash that cause positive cash discrepancies.

Cash Accuracy

To recap, the cash accuracy check is telling us whether cash inflows equal cash outflows for the analysis period. In other words, does the analysis period’s beginning cash balance + all sources of cash = all uses of cash + ending cash balance for the analysis period?  We previously examined common sources of negative cash discrepancies, so let’s look at the potential sources of a positive cash discrepancy. 

Positive Cash Discrepancies

Positive cash discrepancies in the cash accuracy check indicate either the ending cash balance is incorrect or a use of cash for the analysis period is missing. Uses of cash include cash farm expenses, owner withdrawals for family living, capital purchases, principal payments, gifts given, or income taxes paid. Potential cash discrepancy triggers could include:

Missing Farm ExpensesTypically farm expenses are reported correctly. But there are a few potential culprits like missing feeder livestock purchases for the analysis year, as they are reported on the Sch. F until the livestock is sold. How about hedging accounts? Were there hedging losses that lead to additional brokerage account deposits and have not been included in the analysis? Another consideration would be other expenses related to the farm that are not reported on the Sch. F. Contract finishing operations may be an example, where Sch. E is used to report the income received and related expenses. Make sure all cash expenses for the current year are reported in the analysis.
Missing Personal Family Living ExpensesHow much does the farm contribute to family living expenses? This can be especially troublesome if the farmer doesn’t take a set draw from the operation. Also determining an accurate family living number can be difficult if the farm checkbook is used to pay personal expenses. Having an accurate number for family living expenses is important for sole proprietors and when using a consolidated balance sheet that includes personal asset and liability detail. Additionally, did the borrower give any gifts during the analysis period?
Missing Capital PurchasesWere pieces of equipment purchased during the period?  This question should include assets purchased outright and trades. Large ticket purchases like this may not be missed often, but it does happen, especially if the transaction happened right at the beginning of the year. If assets were traded during the analysis period, consider what the borrower is reporting to you in terms of the new asset. At the very least, the “boot” price of the trade needs to be included in your analysis.   
Missing Loan Principal PaymentsChecking the credit report for a borrower reveals the loan balances for a number of credit vendors. But not all banks and alternative sources of credit report agricultural loans to credit bureaus. Therefore, loan principal payments can be missed.  Accurate loan balances are an important starting point in the analysis process. Work with your customer to get accurate beginning and ending loan balances to ensure proper principal payments are used in the analysis.
Incorrect Ending Cash BalanceStarting with the right ending cash balance is imperative in this analysis. The customer’s checkbook balance is to be used, not their deposit account balance at your institution. Their checkbook balance considers end-of-period transactions from the previous period. Oftentimes the producer’s actual checkbook balance is less than the deposit account balance at your institution. This is because of those floating checks the producers have written out for end-of-period expenses that have not yet cleared your institution.

Summary

Cash discrepancy sleuthing is often challenging and can be a frustrating process. In these situations, the goal is to find the missing source or use of cash for the analysis period. Use the steps above as potential starting points when sleuthing positive cash discrepancies in FINPACK Financial Analysis (FINAN) or FINPACK Schedule F Cash to Accrual Analysis. Revisit our previous post to look at sleuthing negative cash discrepancies and if you have questions, contact us and we’ll be happy to 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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