
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.
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.
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.
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