Improve understanding of your farm’s working capital

ANR Week workshop will help farmers of all skill levels understand how to understand farm working capital in order to prioritize options and make timely management decisions.

Past and current milk prices have many dairy farm businesses finding themselves short in making cash flow work. In the last two years, working capital has eroded, unless the business went through a major debt restructure or sold assets. Farm businesses have less cash, less prepaid expenses, more unpaid bills, less inventory of crops, less market livestock and more operating debt, which combined, equates to less working capital.

Working capital is the dollar difference between the value of short-term assets compared to short-term liabilities. Adequate working capital is critical for a farm business to meet cash flow obligations in a timely manner and perhaps to take advantage of early pay discounts on various crop and livestock production inputs. Strong working capital allows the business to avoid cash flow shortages in the event of production/price shortfalls or unexpected large expenses.

A current ratio of 2:1 means that the business has $2 of short-term assets compared to every $1 of short-term liabilities. Short term is defined as one year or less, and includes the principal portion of long-term debts that are due within the next 12 months. Interest that has accrued since the last payment to the date of the balance sheet is also part of current liabilities.

The working capital to gross revenue ratio is a measurement of the working capital divided by the gross sales of the business - a much better measurement than the current ratio. This ratio measures the amount of working capital compared to the size of the business. It is logical that a larger business would need more working capital. Lenders prefer a working capital ratio of 40 percent or better. This means that if the business has $1 million in gross sales, working capital would need to be $400,000 or 40 percent.

Michigan State University Extension farm management educators will conduct a hands-on workshop to assist farmers in learning how to calculate working capital ratio and how to build their farm’s plan to manage the new economic realities in agriculture. Farmers will also learn what can be done to improve the farm’s working capital ratio. The workshop will take place March 8, 2017 at the Kellogg Hotel and Conference Center in East Lansing, Michigan as part of MSU Agriculture and Natural Resources (ANR) Week.

The program will run from 8:30 a.m. - 5 p.m. with registration starting at 8 a.m. Educators will also be available to answer questions during an optional dinner starting at 5:30 p.m. The program costs $125 per person. There are discounts available for additional attendees from the same farm. Learn more about this program and register online.

This program is designed to help everyone, from a novice to an advanced farmer understand your business’ numbers and how that translates into prioritizing options and making timely management decisions.

As the industry continues to change, so do the key factors for your operation’s success, as well as the items a bank will require before providing lending services. This session will also give attendees updates on the industry, explore key factors for success and discuss key documents and information banks need.

Financial experts will be on-hand to answer specialized questions and provide examples. They will help you gain the tools needed to make wise and timely decisions for your operation, allowing you to take the mystery out of your numbers and move your farm forward.

Additional articles in this series: 

Knowing your farm’s production costs helps navigate economic realities

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