Why 40% Working Capital?

Working capital is a measure that gives you a clear picture of the health of your business.

Did you know the greatest motivator of people is progress? Last week I talked about the goal of getting your working capital to 40%. That means yours assets minus your liabilities divided by your gross revenue should be at 40%. While not always an easy number to hit, it is an effective metric to measure because it affords the opportunity to take a look at progress year on year. 

We can unknowingly take our operation in a wrong direction by tracking the wrong numbers. What if we measure success by the look of our equipment? Or how much we saved on taxes? Or the price we sold corn for?

Let's talk about how tracking certain numbers can lead us astray. Decide for yourself the best number to track based on the following examples.

It's nice to have new equipment and not a bad decision if you need the equipment. It's made even sweeter when you sent the money to your local dealer instead of sending it to Uncle Sam. Consider this scenario showing what could happen if you didn't truly need that equipment…

You made a down payment on that tractor, and then financed, creating debt on your books for the duration of the financing. This pulls your working capital lower each of those years. Suddenly you find yourself in a position where you need more capital than expected in another area of the farm. Could be an unexpected repair, underinsured storm damage, or you hurt yourself and need to hire some help for a time. It could be anything.

The payment on the equipment draws your cash down and the additional, unexpected scenario adds insult to injury. Suddenly that tractor which felt like a good idea becomes a drain on your business.

Another common measurement is the price received for selling your corn. You may indeed have received a good price for your corn, and yet spent a lot of money getting there as your marketing strategy took you in a roundabout way. While it is fun to talk about the high price, we know that if it cost you extra getting there your banker will also know and will be less impressed.

A proven, but less popular metric is the one that we track with our clients – equipment inventory per acre. It's one of the finest indicators when we look at the difference between those who have the highest long term break evens and those with the lowest.

 Circling back to working capital – it's a measure that gives us a clear picture of the health of our business. And that's why it's a number we should intentionally track.

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