You don’t need any financial surprises in 2017. While preparing your business plan, ensure you are correctly gauging your operation’s working capital position.
“Working capital is a simple equation of current assets minus current liabilities,” says Evan Hahn, senior agribusiness analyst with Farm Credit Mid-America. “However, the ins and outs of calculating working capital are far more complicated than a simple arithmetic problem.”
Beyond avoiding missteps (see below), also look to improve your position, advises Scott Anderson, farmer and CEO of Cash Cow Farmer, a farm financial advisory and software company in Turton, S.D.
Do so by eliminating nonproductive assets. “If you haven’t used it in two years, sell it, rent it out, or scrap it,” he says. “Turn everything you don’t use regularly into cash.”
Ensure the crops you have slated for 2017 generate the most profit and invest excess cash into productive assets. “Today, you’ve got to run your farm like a Fortune 500 company,” Anderson points
out. “You must analyze everything.”
Common Working Capital Pitfalls
1. Accounting for accrued interest and other annual expenses. “Depending on the loan size and payment frequency, accruing interest can represent a large liability on an operation’s balance sheet,” says Evan Hahn, senior agribusiness analyst with Farm Credit Mid-America. Payments due on an annual or semiannual basis can easily be overlooked. Ensure you are accounting for all expenses throughout the year.
2. Accounting for the current portion of term debt. Working capital measures an operation’s annual assets and liabilities for an operating cycle. “While the long-term liability for any debt should not be counted against working capital, the current portion of term debt, or what’s due in the current year, should be included as a line item,” Hahn says.
3. Calculating working capital at the wrong time of year. You should calculate your working capital on an annual basis, but the time of year matters. “A common mistake farmers make is calculating working capital based on their projections for going to market after harvest,” Hahn explains. “Depending on what actually materializes at harvest and happens with marketing, this can overstate the operation’s assets. Working capital should always be based on real numbers on a balance sheet, not predictions or forecasts.” Therefore, grain farmers should to do calculations at the beginning of the calendar year.
4. Believing working capital is “nonworking” capital. Beyond the ability to secure financing, working capital is there as a cushion for hard times and as a reservoir, allowing you to take advantage of in-the-moment opportunities you might have had to pass on otherwise, Hahn notes. Understand it’s not simply sitting on the balance sheet.