In today’s business climate, volatile and changing game conditions are the only certainty. One must consider financial shock absorbers to cushion the blow of uncontrollable events and position the business for when opportunity is on the doorstep. These shock absorbers are different depending upon the age of the business, enterprises and overall goals and objectives.
First, let’s start with the producer who operates a farm but has an off-farm job. In this case, the shock absorber would be six to nine months of household variable and fixed expenses in cash or near cash. Credit cards and credit lines do not count, since they can disappear with loss of job, an unprofitable farm or macroeconomic adversity.
If a producer’s annual family living costs are $60,000, which is now the national average, keeping $30,000-40,000 in cash or near cash is essential to weather adversity. Yes, you will give up high returns on that money, but with unemployment at 10-20%, and limited job growth, a good stockpile of cash is one method to manage through an extended down cycle.
If you are a young producer with a profitable business, build your working capital, which consists of cash and other current assets that can be turned into cash without disrupting business operations. Examining FINBIN data from the University of Minnesota, the average working capital for grain producers is 44% of revenue. For livestock operations that are currently experiencing the down cycle, the average is 14% of revenue.
I will discuss this topic further next week.
Editor’s note: Dave Kohl, 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 sullylab@vt.edu.