About this time of year you have made the transition from the combine and tractor seat to the computer seat. Your family has heard a lot of crunching lately, and it has been numbers and not potato chips. While you get your taxes and finances in order, you might satisfy your curiosity a bit to see how you are “really” doing. Yes, you have money in the checking account, but there are some equity changes and debt changes, and you are not sure whether or not to feel good about your financial position. As your tax advisor and lender would say, “Let’s take a look at your numbers.”
For years you have been filling out all of the forms offered by FAST Tools, but at the end of the day, you wonder if your working capital, liquidity and all of those other ratios are where they should be. Financial specialists Gary Hachfeld, David Bau, and Robert Holcomb in the University of Minnesota Center for Farm Financial Management have published a new series of financial fact sheets, but the #5 in the series helps you get a good grip on your financial reality.
Your liquidity indicates whether the operation has the ability to generate a sufficient cash flow to pay your debts, your taxes, and feed your family. There are several different yardsticks that are combined to give you a good picture of your liquidity, should your lender happen to ask early next year.
1) Current farm assets include your cash and anything that can be converted to cash within the next 12 months.
2) Current liabilities are your bills that need to be paid within the next 12 months.
If you divide the current assets by the current liabilities, you have a “current ratio” that show for every so many dollars of debt you have so many dollars of assets. If it is more than 1.7, it is strong, but if you are below 1.1, your bank loan file will have a red flag on it.
Another indicator of liquidity is working capital, in which your current liabilities are subtracted from your current assets. The larger the number the better, and bigger operations should have bigger numbers for working capital. It indicates your potential for paying taxes, college tuition, nursing home fees, and Friday night movie tickets. The Minnesota economists say just because you are short on working capital, does not mean you are not wealthy, but it may mean your liquidity is on the “dry” side. They also add that a certain amount of working capital may be totally insufficient for one farm, and way more than sufficient for another farm.