By Kenny Burdine and Jonathan Shepherd
Strong cattle prices are giving cow-calf producers a rare window to strengthen their financial position. While every operation will respond differently, producers should aim to look back on this period and feel confident about the decisions they make.
In an article last summer, investments in genetics, facilities, and grazing systems were discussed, as well as paying down debt and improving liquidity. Here, we dive deeper into improving liquidity by focusing specifically on one often-overlooked opportunity: building working capital.
The financial formula for working capital is current assets minus current liabilities. In simple terms, it refers to the amount of readily available assets beyond what is needed for short-term obligations. Current assets include cash and marketable commodities (livestock, grain, etc.) that can be converted to cash quickly. A farm business should always have at least enough current assets to cover current liabilities, and depending on the type of business as much as 2-3 times the current liabilities may be recommended. When the opportunity presents itself, there are substantial benefits to growing working capital beyond just meeting typical current liability needs. A few of these benefits are discussed briefly below.
Self-finance short-term expenses
With stronger working capital, producers can pay cash for expenses instead of relying on operating loans. This reduces interest costs, a valuable advantage in today’s higher-rate environment. The current environment also offers more attractive returns on working capital kept in liquid investments such as money markets and high-yield savings accounts.
Click here to see more...