first_imgShare Facebook Twitter Google + LinkedIn Pinterest Working capital is a financial indicator that is meant to measure an operation’s annual assets and liabilities. While the long-term liability for any debt should not be counted against working capital, the current portion of term debt – or what’s due in the current year – should be calculated and included as a line item.“Some farmers may see working capital as money that’s simply sitting on the balance sheet and not being put to use, however, having a strong working capital position allows you to do what’s needed on your operation,” said Evan Hahn, Vice President Credit, Farm Credit Mid-America. “Working capital is there as a cushion for hard times and as a reservoir, allowing you to take advantage of in-the-moment opportunities you may have had to pass on otherwise.”Going through the exercise of calculating working capital on an annual basis is key, but certain times of the year are more beneficial than others.“A common mistake some farmers make is calculating working capital based on their projections for going to market after harvest and depending on what actually happens at market, this can overstate the operation’s assets,” Hahn said. “A better time to calculate your working capital position is at the beginning of the year.”Cash burn rate is calculated after the working capital position has been determined. Take the dollar amount of the working capital your operation has on hand and divide it by projected loss for the year.“Cash burn rate is a key financial measure because it indicates whether your operation is in a position of strength or a position of challenge and during a struggling ag economy, knowing your cash burn rate aids in making key financial decisions, including whether or not to refinance loans or if any fixed costs need to be better controlled,” Hahn said. “Ideally, your operation should have enough capital on hand to withstand multiple years of losses. At a bare minimum, your operation should have enough working capital to cover one year of loss.”Listen in to the latest “Financially Speaking with Farm Credit Mid-America”Farm Credit Mid America Full Interview Evan Hahn 7.25.16last_img

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