The Road Warrior recently stopped in Spearfish, SD, for the agribankers school at Black Hills State University. A perceptive agrilender from Oklahoma forwarded an interesting concept. He likes to discuss financial numbers that producers can remember away from the office, or out on their tractor or combine. The following is a list of a few compiled by the class.
Debt-to-Asset Ratio of 50%
If you are a grain producer, exceeding this level requires very astute management and a frugal living style. If your operation is diversified or you are just beginning, higher degrees of financial leverage are acceptable, but they may come with higher interest rates and stricter covenants in the loan agreement to cover risk. Remember: The No. 1 financial factor that predicted financial stress in a farm or ranch business in the 1980s was a debt-to-asset ratio exceeding 50%.
Working Capital Exceeding 15% of Revenue or Expenses
Throw out the current ratio and bring on the working capital ratio. Subtract current liabilities from current assets to get working capital, then divide the result by your revenue or expenses. In today’s volatile times, maintain 15% as a guideline. To be on the safe side, maintain 15-33%. If you are conservative or desire flexibility, maintain levels above 33%. Warning: Grain producers’ working capital metrics need to be increasing in the current environment.
I will have more numbers to discuss the next time.
Side Note: This year’s visit to Deadwood, SD, the home of Wild Bill Hickok and Calamity Jane, found it to be a ghost town. High gas prices and the economy are slowing travel to these recreational hot spots. I noticed the same thing occurring in Branson, MO.
Editor’s note: Dave Kohl, The Corn & Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at email@example.com.