Farm Futures logo

Killers of financial liquidityKillers of financial liquidity

Road warrior: Some of the worst long-term business decisions are made during good economic times.

David Kohl, Contributing Writer, Farm Futures

January 21, 2025

3 Min Read
Killers of financial liquidity
Getty images

The discussion during a recent roundtable of agricultural lenders centered on the topic of working capital killers. Working capital is not only cash, but short-term assets such as inventories, accounts receivable, crops growing in the field, and prepaid expenses that can be converted to cash over a short-term cycle. Of course, these assets are balanced against short-term obligations such as accounts payable, accrued expenses, balances on operating lines of credit, and payments of principal and interest due within one year. After an extended discussion, the group generated a list of working capital killers that are commonly observed.

Tax season

Tax season brings on a dangerous period of time, usually late in November and December. Many producers do not like to pay federal and state income taxes and as a result put capital expenditures on steroids. The problem is that they will spend $1.00 to save $0.20 to $0.25 in taxes. These year-end purchases often deplete cash reserves. Some producers must resort to borrowing the needed capital, which creates debt service obligations for the next three to seven years. A carefully thought out and balanced program of tax management and working capital as well as a wants versus needs assessment for capital expenditures needs to be a high priority.

Related:NYC-Area poultry markets shut temporarily on Bird Flu concern

Pricing strategy

Another killer of working capital pertains to risk management and marketing strategies. Here is where the pricing strategy for grain in the bin or cattle on feed can be a prudent measure to preserve and protect working capital when an accrual financial analysis is conducted. This past year, many farm management consultants have expressed to me that their clients are losing $300,000 to $500,000 in working capital without a sound, well-executed marketing and risk management plan.

Good economic times were also listed as another working capital killer. Some of the worst long-term business decisions are made during good economic times. Similar to the famous country song “Good Time Charlie’s Got the Blues,” good economic times were expected to be extended, resulting in cash reserves from profits being invested in long-term assets such as land. This locks up the cash reserves which provide the necessary flexibility, agility, and resilience when the economic cycle eventually heads south.

Debt refinancing

Another working capital killer discussed was post debt refinancing where the working capital is generated by the lender with no operational or financial plan to improve the financial situation. Without a plan, financial losses can continue to drain working capital reserves, resulting in another request for working capital that further depletes equity.

Related:7 ag stories you can’t miss – February 7, 2025

Finally, the working capital killer that is dreaded by lenders is using working capital reserves for unproductive assets. These are often known as “killer toys" or excessive spending on lifestyle. Yes, one must smell the roses, but you also need to be careful that they do not turn into thorns.

Protect working capital

The roundtable discussion with agricultural lenders brought to light a few working capital killers that have been observed from the other side of the desk. As the agriculture industry navigates uncertain economic times, it is critical to protect and maintain working capital by avoiding some of the aforementioned working capital killers.

About the Author

David Kohl

Contributing Writer, Farm Futures

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

Subscribe to receive top agriculture news
Be informed daily with these free e-newsletters

You May Also Like