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n. Illinois | There is no set answer to that question. The only thing to avoid is negative working capital because its negative working capital that has taken every operation down. Now if you have no earnings or inadequate earnings you will find it impossible to maintain working capital. Earnings are the life blood of every business without it no operation can succeed. Liquidity is like a surge tank on a hydraulic system, its there to absorb financial shocks IE earnings are short or an opportunity arrives at a large discounted price but it takes cash to get the deal. there is no set amount that anyone can point to and say that is enough. However it needs to be looked at as a % of gross sales. IE you need more if your gross is $50 million vs. if your gross is $5 million etc. so look at it as a % of your gross income; goal would be to be more than 25% of your gross income, Once you get to working capital levels that exceed 100% of gross it would take some very unique situations for that operation to get into serious financial trouble.
the worse type of operation is the one with a solid net worth (most likely because of inherited farm ground) and poor earnings and lack of working capital. IE They are just eating up their equity, they can be financed if your honest with them and limit your financing to what a reasonable cash rent minus RE Taxes would payback on a real estate loan that is amortized at 15-20 years at current interest rates. | |
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Future of grain prices
