Examining Your Balance Sheet and Working Capital

With the downturn in grain prices over the last several years, farmers really need to be examining their operation’s balance sheet and asking what looks good and what needs to change. Dr. Dave Kohl, Globetrotting Emeritus ag econ professor from Virginia Tech shares an important aspect of your financials is your operation’s working capital.
Kohl: “I think one of the things that we are noticing is on the top half of that balance sheet current assets and current liabilities — and when you deduct each you get working capital. The ones we find that are going to be able to have dry powder but also protect so they don’t have to sell assets in a down period. They will have a working capital of 40 to 50 percent of revenue or expenses. Where the ones that are struggling they’ve used up all their dry powder — they used it to grow. They used to invest in capital assets maybe machinery etc. They often will have an level of working capital to revenue/expenses maybe about 5 to 10 percent or even negative. You’ve got to remember — working capital is your financial shock absorber. It gives you resiliency but it also gives you flexibility. Equity does not pay the bills —- cash flow, profits and working capital are going to be the three key elements.”
Dr. Kohl adds that your working capital doesn’t have to be all in cash — he suggests that at least 10 percent of working capital be cash in the bank. However, he says the the closer to cash it is — the more flexibility it allows you.