The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
Whether it is a nation, individual business or personal household budget, financial liquidity can be the bridge in financial management. For example, Russia recently had difficulty meeting bond interest payments when economic sanctions by Western nations resulted in financial liquidity issues. I often emphasize financial liquidity in many of my educational programs for farmers and ranchers, and personal finance experts, such as Dave Ramsey and Suzy Orman, provide benchmarks concerning personal household liquidity.
The deep dive
The top half of the balance sheet will become very important in the next few years as a result of increased economic volatility and a possible recession. The current section of the balance sheet is a financial bridge to block adversity and position for opportunity.
The current ratio, calculated by dividing current assets by current liabilities, and working capital divided by revenue or expenses are common metrics to assess your business liquidity status. Along with calculating these ratios, one needs to take a deep dive to ascertain the quality and timing of assets and the effect current liabilities will have when testing for financial stress.
For example, if your business has accounts receivable, what is the amount and the quality? Will your customers pay and at what date, which is why an aging of accounts receivable is critical in liquidity analysis. Whether it is crops, livestock or both, many farms have inventory on the balance sheet. What is the quality of inventory and is there a marketing and risk management program or marketing contract? If so, what are the terms and timing, and will inventory be used to meet financial commitments?
Close observation of working capital lines of credit is imperative. Due to inflated costs, larger amounts of working capital are required, which has led to many lines of credit being maxed out. Can the lines of credit be paid down by the sale of inventory, collection of accounts receivable, and crops and livestock that are in the production process?
The status of prepaid expenses, accrued expenses and accounts payable need constant vigilance. Over the next one to three years, converting current assets to cash without disrupting normal operations will be in the top five priorities in an inflationary and increased interest rate environment.
Operating a business in this decade will highlight the value of having an advisory team and working closely with your agricultural lender. These relationships can be invaluable for your liquidity assessment when making both short and long-term decisions.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.
© Northwest Farm Credit Services 2022
Stay up to date
Receive email notifications about Northwest and global and agricultural and economic perspectives, trends, programs, events, webinars and articles.Subscribe
Questions or Comments?
Contact us at 866.552.9193 or message us via the contact us form.Contact us