Oct 26, 2023
Working capital generally refers to the liquid funds an ag operation has accessible to spend on short-term financial needs.
This cash in hand is essential to:
Handle unexpected financial impacts, like drought conditions impacting crop yield or market swings affecting interest rates
Take advantage of unanticipated, fast-moving growth opportunities, like an ideal parcel of land going up for sale or equipment being available for discounted purchase.
Working capital, which can be calculated as current assets divided by current liabilities, is often expressed as a ratio. Current ratios of 1.7 or above indicate a strong financial position, while ratios of 1.2 or below illustrate potential financial risk.
Current assets can include cash and checking accounts, supplies and equipment, stored crops, or prepaid expenses. Current liabilities can include accounts payable, rents or leases, credit card balances or taxes.
In this calculation, “current” refers to assets that can be converted into cash within one year and liabilities that must be addressed within a year; this does not apply to intermediate or long-term assets and liabilities, which are categorized differently when calculating working capital or other balance sheet figures.
Another approach to calculating working capital, which some financial institutions consider to be more reliable, is to compare working capital to gross revenue of the operation. By dividing working capital by gross sales, farmers can assess their ag operation’s cash needs more accurately based on the exact scale and size of their unique farm.
[Calculate your assets and liabilities using the free Balance Sheet template from FBN® Finance]
Having a reserve of cash on hand positions farmers to be agile in their response to market shifts, unexpected weather impacts, and other unpredictable changes to their operation. Interest rate increases, drought conditions, rising input costs and other shifts can all quickly affect ag operations; having working capital empowers farmers to handle these unforeseen challenges.
In more positive scenarios, having working capital also positions farmers to take advantage of unique deals on land sales, equipment purchases or other opportunities that require quick action and immediate access to liquid funding.
[Stay up to date on the latest interest rate increases and what they mean for farmers with new posts on the FBN blog. Here’s the latest update.]
Many financial experts recommend a 20-35% working capital buffer; this refers to working capital that is 20-35% of gross revenue or total expense. Alternatively, many lenders prefer a higher buffer of about 40%. However, the answer to this question really depends on each ag operation’s financial situation and plans for the future.
The amount of working capital farmers need hinges on a few common factors, including the operation’s:
Size - Larger operations require more working capital due to their bigger scale.
Volatility - Ag operations with narrow margins are at a higher risk for financial challenges. Having extra working capital can help cover financial needs in the event negative margins occur.
Risk Outlook - A more financially conscious, risk averse farmer may want to have additional working capital to be prepared against any potential shifts in the market, especially given recent market volatility. In this case, many financial institutions recommend 35% or slightly more as a buffer.
Even in secure financial times, it’s generally a good idea to maintain a strong working capital position to remain prepared for the next stage of the agronomic cycle, potential growth opportunities or unanticipated financial changes in the future.
Working capital helps farmers scale their operations while remaining protected in the event of market fluctuations, adverse weather conditions or other unexpected challenges and ready to take advantage of land acquisition or equipment purchase opportunities.
If you’d like to be more confident in your working capital reserves, are preparing to expand your farm, or are looking to increase your financial stability, the FBN Finance team is ready to help you secure the operating line you need to build a stronger financial future.
Backed by great rates, flexible repayment terms, instant approvals* and exceptional service from loan advisors with hands-on ag experience, FBN Finance’s ag operating lines have lent stability to many farmers just like you across the United States. FBN Finance also offers land loans to help farmers start or expand their operation with a new land purchase, in addition to farm equipment loans to help farmers buy the equipment they need without putting a strain on current budget or operational cash flow.
With a variety of financial solutions available, FBN Finance is ready to help you strengthen your farm’s financial position and continue growing for years to come.
Talk to a member of our team today by completing the form below or calling 866-551-3950 to see how FBN Finance can support your ag operation.
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Oct 26, 2023