Now is a good time to take a long look into a farm’s financial situation. One way to do that is by determining the farm’s working capital, which is the difference between a farm’s current assets and its current liabilities.
“This is that time of the year when our staff at Illinois FBFM are hard at work closing out 2018 records so that we can put together accrual income statements and balance sheets,” says Dwight Raab, CEO of Illinois Farm Business Farm Management.
“So that we can mark the progress in 2018 and use that information to point us in the right direction. That balance sheet and those working capital measures are vital to know where we’ve been and where we’re going.”
Raab equates working capital as an indicator of how much gas is in the farm’s tank to power through the year. After several consecutive years of low commodity prices, it’s quite likely that a farm’s working capital isn’t as strong as it was earlier in the decade.
Unsold stored grain and soybeans qualify as current assets, since it can easily be sold and transferred to cash on the balance sheet. That is, provided a price presents itself that’s worth making a sale.
One method to improve the farm’s working capital is to refinance debt. That would lessen the current liabilities, but Raab warns that doing so could have other financial obligations.
“We’re taking some of our current debt and putting it down lower on the balance sheet,” Raab said. “That doesn’t change our net worth, but it has the effect of increasing our working capital. So that’s a good thing; those things can provide more liquidity, but the tradeoff is now we have a payment schedule.”
“Sometimes we’re taking one year and paying for it over five or seven or 10 years, depending on what the payment plan is.”
Source: Illinois Farm Bureau