Farms must pay attention to their balance sheet’s liquidity
Farm balance sheets are under pressure this year, and the storm may not just come from the weather.
Between eroded margins, interest rate volatility, trade disruptions and stubborn input costs, cash is not just king — it is survival. Accurately measuring and managing your business’s liquidity will protect it against risk and uncertainty and improve your ability to capture opportunities.
Liquidity is your farm’s ability to meet its short-term financial obligations without obstacles. Can you cover payroll, supplier credit and living expenses without leaning too hard on operating loans? Is there enough cash and cash-equivalents to easily settle the payments on your debts? How about your taxes? What happens when a payment’s due and the grain cheque has not cleared yet?
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Having strong working capital means you get to stay in control even when prices or yields do not go your way.
Liquidity is what keeps the lights on, the feed trucks and combines rolling and the bills paid when everything else tightens up. It is your defence against unexpected shocks and your springboard to seize opportunities where others cannot.
Without a clear understanding of where your farm’s cash is coming from and going to, too many farm businesses end up reacting instead of planning.
In a year where costs might be expected to burn more of your revenues than they may have in the past, paying attention to your balance sheet’s liquidity will serve you well in the short term.
If cash flow is the stream that keeps the business moving day to day, then working capital is the reservoir built up in good times to ensure you can weather the bad. It is the foundation that lets you hold your ground through leaner seasons or take a confident step forward when the time is right.
Working capital is the farm’s short-term operating cushion, representing the amount of cash available to operate after converting assets to cash and settling short-term debts.
Simply put, it is calculated by subtracting current liabilities from current assets.
While the number itself can be positive or negative, depending on timing and measurement, it is the context that makes the figure meaningful. That is why measuring working capital as a percentage of total farm expenses is a far better indicator of your farm’s short-term financial strength.
By dividing working capital by your total cash expenses, you get a clearer sense of how much of the operation is supported by cash versus debt.
If the percentage is low, the business is leaning on borrowed funds and subject to the terms that come with them. If the percentage is high, there’s room to explore re-investment, strategic purchases or even a well-timed pause to assess your next move.
Perhaps your revenue has reached levels you have not seen before. What then?
First, build a suitable level of working capital. Then, assess how efficiently you generated it. Was it through debt reduction, an increase in inventory or a drop in payables?
Evaluate whether those were the right choices and think critically about what you want to do next.
Examine your working capital percentage — a strong position is anything above 100 per cent, meaning your working capital could support the entirety of your farm’s operating expenses for the year. That is an enviable situation to find yourself in.
A figure below 50 per cent, however, signals fragility. One hiccup — a missed delivery, weather-related crop failure or market downturn — could send you to the lender’s office looking for a capital injection, which might not come on favourable terms.
If your working capital is not where you want it to be, and you are wondering how to manage through the year, start by mapping out your cash flow.
An annual overview will not cut it. Quarterly is a decent start, but monthly is better.
Plot out the next 12 months and lay out everything: sales of crops and livestock, government program payments, custom work, surface leases and even planned equipment sales.
Then match it with your projected expenses: all outlays of cash for inputs, insurance, fuel, wages, repairs, loan payments, capital purchases, your family’s living expenses — everything categorized within the month you expect it to come in or go out.
See that it matches your expectations and your month-end cash position. Note how negative or positive it may be, and how it will change month-to-month.
Update the sheet as actual numbers roll in to see how close or far off your projections were, and why that may be so you can better refine future forecasts and plans.
This kind of cash flow forecast is not just a management exercise; it is a confidence-builder. It shows you where your pressure points are and where your buffers exist.
It can help you make timely decisions, such as whether to take a pre-buy discount, when to list equipment or if now is the right time to pursue that land deal.
It may also reveal misalignment in your marketing and expense timing, giving you the chance to harmonize payments and receivables.
These forecasts also become valuable tools in conversations with lenders, advisers or partners. They demonstrate preparedness and give credibility to your projections and requests. They can even support negotiations for improved lending terms or operating credit limits, helping you avoid short-term squeezes that damage long-term equity.
There is no shortage of templates or tools to help you get started. Whether you use a spreadsheet, accounting software or something more sophisticated, the key is diligent attention to detail. Done well, a cash flow projection is more than a spreadsheet; it is a blueprint for navigating the year ahead.
Liquidity does not fix every problem, but it buys you time, options and peace of mind. It’s your defence when markets fluctuate, input costs surge or weather disrupts your plans — the very challenges threatening farm balance sheets this year.
More importantly, strong working capital serves as your launch pad when opportunities arise, allowing you to act decisively while others hesitate.
This month, take concrete steps to strengthen your farm’s financial position. Calculate your current working capital percentage (working capital ÷ total farm cash expenses) and create a month-by-month cash flow projection for the next 12 months or develop contingency plans for the months where your cash flow historically runs lean.
In a year when eroded margins, interest rate volatility and stubborn input costs threaten to squeeze the life out of farm operations, managing your liquidity isn’t just good business practice — it’s survival.
The time to strengthen your financial foundation is now, before the storm intensifies.
Blake Copley is a farm management consultant with Backswath Management Inc. He can be reached at 825-712-7684 or blake.copley@backswath.com.
Source: producer.com