Working capital = your current assets MINUS your current liabilities (what you need to pay off in the next year)
It’s a representative of your ability to weather your short term commitments. Different farms (with different focuses, for eg. wheat vs. dairy) will have different working capital expectations.
By rule of thumb, you should have 25% of next-years expenses sitting in working capital. So, if you have 1.25 million dollars of assets sitting there in cash or inventory and you have 1 million dollars of expenses next year, then you will have a $250,000 buffer to allow for some breathing room for next-years expenses. If your farm has no breathing room, you’ll have to have a plan for what will get you through the down curve, or unexpected events in your farming production.
Watch Reg Shandro shares a few simple tips to take a look at how your capital is working for you.
This workshop was funded in part by the Agriculture & Food Council of Alberta