Your working capital is one of the most important financial measures on your farm. We know it's important. Maybe we feel like we've heard about it over and over. But in good times, we might start to forget why we need to keep an eye on it.
One of the Ag bankers I know, Bob Boesdorfer from First Midwest, has an example that paints a pretty clear picture of how working capital affects the farm's viability as a business. He said that in the '90s, the ag banker's job was a little different than it is now, because the banker and his farmer clients still had the '80s fresh in their minds.
Those of you who farmed in the '80s know that it was a particularly volatile time in agriculture. With high interest rates, many operations went out of business. Others struggled for years to get back on their feet.
It became clear that in any given year, a farming operation could lose a lot of money. Farmers needed to have working capital that equaled at least the amount they had at risk each year. Otherwise, they might be out of business.
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These scenarios were everywhere in the '80s. The farmers who were left standing learned a great deal from what they saw around them and perhaps from their own financial problems. They kept this knowledge with them as they continued to farm.
The overall situation in Ag right now is different. We've seen some good years recently. I remember the '80s, but many of you younger farmers weren't even born yet. Dad might have told you 'things aren't likely to stay this good forever.'
Maintaining strong levels of working capital is going to be important for farmers who want to be in business for the long haul.
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Here's some advice the banker shared about working capital.
Think of your working capital as your ability to put in at least a portion of next year's crop. It's your cushion. It's what you have to work with before you'd become reliant on the bank to be able to plant. The borrowing process starts to become quite difficult if you're depending on the bank for 80-90% of your crop expenses in a given year.
That can be avoided if you maintain a strong level of working capital. We ask our clients to strive for about 40% working capital. That guarantees they'd be able to plant at least some of their next crop without having to borrow money. If your operation includes livestock, you'll want that percentage to be higher.
These lessons from the '80s can tell us something today. If you weren't farming in the '80s, find someone who was and ask them to tell you about it. Ask if they would have done anything differently. Listen to their advice. Learn from the past to help you build your future.
Darren Frye grew up on an innovative, integrated Illinois farm. He began trading commodities in 1982 and started his first business in 1987, specializing in fertilizer distribution and crop consulting. In 1994, he started a consulting business, Water Street Solutions to help Midwest farmers achieve success through financial analysis, insurance, commodity marketing, and legacy planning. The mission of Finance First is to get you to look at spreadsheets and see opportunity, to see your business for what it can be, and to help you build your agricultural legacy. Contact Darren at firstname.lastname@example.org.
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