2011 may be a good year to increase your working capital. Let's think strategically about that now – while we're in the possibility phase. It is a given that Uncle Sam takes a chunk of our profit when profit is indeed the result of our year. The unknown of how the government chooses to spend it can be frustrating to say the least. Let's not let irritation over a yet unknown (because irritation is an emotion) dictate the future of your business.
Working capital is a very good thing. It allows flexibility. It means independence. And more and more it is a requirement. We encourage our clients toward a ratio of 40% working capital to gross revenue. This may seem like a large number and it's probably more than the bank requires. As part of a strategy it is a number that will have you better poised for the future. Some farmers may even choose to have a higher ratio if they are preparing for a land purchase.
Let's look at the reason why a higher level of working capital is increasingly important.
You remember that a few years ago commodity prices were lower, input prices were lower, and land prices were lower. Flash back 5 years and imagine that you are at a $5 poker table with $50 to lose. You could play ten hands at the very least. Today with commodity prices being higher, it compares to stepping up to a $50 table with $50 to lose. One hand and one potential loss make the stakes much higher.
Think back to what I wrote earlier – working capital allows flexibility and independence.
In your operation today if you don't have sufficient working capital on hand and the operation undergoes a production problem, or a poor marketing decision cripples you a bit, you have lost that flexibility, that one hand. Too many losses can be costly.
Another analogy is the game of Monopoly. By applying the strategy of ensuring good working capital you will likely win more Monopoly. Greed is the downfall of those who find themselves stepping away from the board early on. But stash your cash and be patient around the board, buying as you pass 'Go' while earning money on a few properties, and you're more likely to end up the winner. The same strategy and patience holds true in farming. Take time now to ponder your position.
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