Cash from farming and ranching operations is forecast to be very tight in 2019, making repayment difficult for farm managers who need to cover machinery payments, real estate payments and operating loans.
Working capital, also called liquidity, is the financial term used to state how much money is available, after grain and livestock are sold, to make payments that are due within the next year. Working capital is formally defined as current assets (cash, accounts receivable, crop inventory, livestock held for sale, etc.) minus current liabilities (accounts payable, short-term loans, principal on term loans, income taxes, accrued interest, etc.).
Working capital is necessary to pay for family living costs and to cover unexpected expenses such as large repair bills. A farm should have a strong positive working capital before making large capital purchases so that a down payment and additional forthcoming payments do not adversely affect the farm’s ability to pay its current obligations.
Lenders often look at the working-capital-to-gross-revenue ratio (working capital divided by gross revenues) to determine if a farm has adequate cash to meet all debt obligations relative to the size of the farm business.
A Farm Finance Scorecard published by the Center for Farm Financial Management at the University of Minnesota indicates that a ratio of 30% or more is considered strong while a ratio of 10% or less is considered weak.
Note: If gross revenue is low at the same time that working capital is low, the ratio may look “okay” even when working capital is insufficient to meet all family living and debt obligations.Fewell is the director of Farm Business Management at the Lake Region State College, Devils Lake, N.D.