Working Capital Is Your Best Investment

An article by Drovers

Strong cattle prices are giving cow-calf producers a rare window to strengthen their financial position. While every operation will respond differently, producers should aim to look back on this period and feel confident about the decisions they make.

In an article last summer, investments in genetics, facilities and grazing systems were discussed, as well as paying down debt and improving liquidity. Here, we dive deeper into improving liquidity by focusing specifically on one often-overlooked opportunity: building working capital.

The financial formula for working capital is current assets minus current liabilities. In simple terms, it refers to the amount of readily available assets beyond what is needed for short-term obligations. Current assets include cash and marketable commodities — livestock, grain, etc. — that can be converted to cash quickly. A farm business should always have at least enough current assets to cover current liabilities, and depending on the type of business, as much as two to three times the current liabilities may be recommended.

For the full article click here