How Much Working Capital Do You Need?

December 23, 2015 12:00 PM

Maintain your working capital – that’s a given. But how much working capital will you need? Ag economists Michael Boehlje, Michael Langemeier and Ken Foster addressed this question in the December 2015 Purdue Agricultural Economics Report.

“The answer to this question depends on both the risk and size characteristics of the business, and the volatility of the business climate,” they note.

For example, a 15% to 25% buffer is often recommended (working capital that is 15% to 25% of total expense or gross revenue), but higher volatility means a higher buffer may be needed. When margins are negative, the burn rate of working capital can quickly accelerate.

“Lenders today are increasingly concerned about the burn rate on working capital,” the Purdue economists note. “Given the expected losses, even those who currently have strong working capital positions might find it deteriorating quickly over the next couple of years.”

Because of that, some experts say the working capital buffer needs to be as high as 35%, given margin pressures and increased uncertainty.

So what can farmers do in the current economic climate? The first thing to do is maintain an adequate portion of your asset base that you can easily convert to cash, the economists recommend.

“One of the easiest ways to manage working capital is to protect cash,” they note.

When you sell grain, that money can be kept as cash, used for inputs or used to purchase machinery or other capital items, or withdrawn from the business. Although there will be specific instances when it will be necessary to purchase assets or withdraw cash, keep close track of these instances because they can have a big effect on financial liquidity, they say.

Repayment schedule on debt can also have a big impact on working capital.

“If adequate collateral is available, the debt might be restructured with some of the operating line added to the term debt so that it can be repaid over more years, thus reducing current debt obligations and increasing working capital,” they say.

Finally, revisit capital assets that are not mission critical to the business, such as a vacation home, or even less productive land or excess machinery.

“This strategy is often not the first strategy pursued, but in situations in which cash is relatively short, it should not be excluded from the toolbox,” they admit.

To learn how several farmers developed strategies to manage working capital, go to

Back to news



Spell Check

Sumner, IA
12/23/2015 06:48 PM

  You know these articles are getting old fast. Two years ago no one could do any wrong. Now the sky is falling. Capital is king, yes no argument. But selling equipment, or trading down is a oxy moron. That new tractor you bought isn't worth what you paid or what you have it listed for on your balance sheet. If you sold it you would take a bath. Vacations and extra goodies may need to be throttled back, but name one business out there that your income drops by 50% in 12-18 months. These markets are overdone, and everyone is feeding on doom and gloom. Trim what you can, save where ever you can and hang in there folks

Buxton, ND
12/23/2015 08:11 PM

  These articles should of been posted 4 years ago not now. Save your cash so when times turn you can buy cheaper land, equipment, etc. Now I want to hear how u can explain to your land lord that revenue has dropped in half and they need to understand and share a little. Most important is the fertizler seed and chemical company's need to drop more. Corn seed keeps going up makes no sense. They say we need to keep our margin well farmers have no margin. Good luck to everyone in 2016 and let's hope some prices turn around a little so we don't have to see our friends and neighbors at auction sales.

Newman Lake, WA
12/26/2015 01:44 PM

  Well stated. The negative emotion of the current grain market is driving doom and gloom scenarios. Well managed farms can survive, but it will take cost management, looking for marketing opportunities such as selling into a market rally and alternative cropping


Corn College TV Education Series


Get nearly 8 hours of educational video with Farm Journal's top agronomists. Produced in the field and neatly organized by topic, from spring prep to post-harvest. Order now!


Market Data provided by
Brought to you by Beyer