This past week I had a short visit in Harrisburg, PA, to speak at a dairy stakeholders meeting. Then I flew to Billings, MT, and took a trip in my rental car to Powell, WY, to speak to a producer group. My final stop was in Spokane, WA, to address the Washington Association of Wheat Growers.
After a workout in the basement of the First National Bank and Trust, I addressed a number of the bank’s customers at the downtown commons. (What a novel idea having a workout center in the bank to improve productivity.) Gary Mills, one of the bank account officers, had a great perspective on working capital.
Working capital and cash reserves are like shock absorbers on a vehicle. If you are driving down the road and experiencing a bump, if you don’t have proper shocks or your shocks are worn out, you can be thrown off the road.
Working capital is the financial shock absorber of your financial vehicle. If you have sufficient assets that can be turned to cash without disrupting your normal operations, you can weather short run economic bumps.
How much economic cushion is necessary? Net working capital should be 10 percent of expenses at a minimum. Twenty to 25 percent provides a good cushion for normal economic adversity. In the household, two to six months of income is often recommended as a cushion.
The drive from Cody, WY, and the Powell Valley up through the Big Horns is very majestic. The Yellowstone River and the rugged terrain make for an enjoyable backdrop as one observes the snow-covered Rocky Mountains.
Last week Alicia, my graduate assistant, stumped me on this one. It takes 345 of these to make one of this. She heard the question on the radio, called in, and won a prize. Can you guess the answer? The answer is that it takes 345 squirts of milk from a cow’s udder to make one gallon of milk, on average. I may find out if the trivia is true one of these cold mornings when my milking machine refuses to start!
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist at Virginia Tech. He recently completed a sabbatical working with the Royal Bank of Canada. He is now back at Virginia Tech with his academic appointment, which is teaching, extension, and applied research.
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