If there’s one thing you need to worry about as a farmer, it’s your working capital. Choosing to ignore this need is like planting the seed for your farm’s demise. Understanding what working capital is and how you can have it is an important step (hopefully beginning step) as a farmer.
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What is Working Capital?
You can think of working capital as your available funds. The liquid assets you have that you can turn into cash in a moment’s notice is your working capital. It’s not strictly the cash you have in a checking or savings account. It can be any of the following:
- Accounts receivable (money you are owed and should receive soon)
- The value of your current inventory
- Current crops
From this amount, though, you must subtract any current liabilities. These include things like accounts payable (bills you have to pay still), loan payments, or any other outstanding debts that you have to pay within the short-term.
How Can Working Capital Help You?
Working capital is your ‘back up.’ It’s the way to make sure that you have the money you need if a financial crisis occurs. For example, a crop goes bad and you need the money to plant another crop in order to meet the demand of your customers. Since the original crop went bad, you don’t have any income coming in, so you need to rely on your working capital to get things back up and running. Without it, you could find yourself going out of business due to
lack of funds.
Figuring Out Your Magic Number
How much working capital does your farm need? There is no cut and dry answer to this question. It depends on many factors including the size of your farm, the amount of crops you grow, and the size of your outstanding liabilities. Basically, your working capital is going to keep you in business, so it’s whatever buffer you need to keep you there.
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If you want a number, total up your projected revenue and/or liabilities. Then take 25% of that amount and make that your working capital goal. If you have that amount of money lying around or easily accessible, you should be able to dig yourself out of any
financial hole that appears.
Keeping Your Working Capital
It might seem difficult to maintain your working capital as you try to keep your farm afloat. As new expenses arise, you may find yourself wanting to cash in on your assets to pay for your farm’s needs. Instead, though, you can focus on using the incoming cash to pay your liabilities. Of course, there will be times you will have to draw on the working capital, but having someone that understands the need to preserve it can help you maintain your working capital.
If you get into a position where you have no working capital, you may have to take drastic measures, such as selling machinery or other assets to get a short-term gain on your working capital until you have things back under control. This isn’t a recommended strategy over the long haul, though, so don’t use it as a primary strategy.
Working capital can mean the difference between success and failure. Figure out the best way to maintain your capital while keeping your farm running. Sit down and create a plan so that you know exactly how you will operate the farm and make the most of your working capital so that you can see the expansion and success you want in the future.
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