Cash Is King - The Importance of Working Capital
Cash Is King
The Importance of Working Capital
by Mike Williams
SVP Branch Operations,
Chief Services Officer
Farm Credit Midsouth
The textbook definition of working capital is “the capital a business uses in its day-to-day operations, calculated as current assets minus current liabilities.” In layman’s terms, it is the cash left over after you pay your bills.
Why does an operation need working capital? It is very useful in a farming operation and is the first line of defense against crop losses. Lenders like it because it provides liquidity and stability to an operation. Farmers like it because they can use it to buy equipment, make a down payment on real estate, supplement operating expenses or, if there is enough, buy real estate.
How much do I need? For a full-time row crop farming operation, the minimum standard is 15% of Average Gross Income (AGI). If a farming operation has farm and non-farm gross income of $500,000, then you would need 15% or $75,000 of working capital on hand for reserves. Poultry and livestock operations require less working capital because the operating requirements are significantly less.
If I don’t have 15% of AGI, how do I get there? Working capital is made from profits of the operation. Some farmers use too much of their available working capital and buy equipment out of cash because they want a piece of equipment paid for. It is better to finance some of your equipment and keep the necessary reserves on hand to pay for shortfalls in an operation. By having working capital on hand, you don’t have to talk with your lender about setting up a term loan to pay for crop losses.
Why do I need extra cash laying around if CDs aren’t paying anything? Extra cash laying around is not a bad thing. Put it to work for you. Use those funds to operate. The less you have to borrow from a lender means the more interest you will save. Row crop farming is challenging at times. Most operations will experience a loss one out of seven years. Having reserves on hand may mean the difference between staying in business and going out of business.
The takeaway? Be prepared for the next disaster. Cash truly is king.
Mike Williams holds a Bachelor’s of Science in Agriculture Business and Economics from Arkansas State University. He is also a graduate of the Barret School of Banking in Memphis. Mike began his career with Farm Credit of Eastern Arkansas in 1992 as a loan officer in Piggott. In 2006, he became the Branch Manager of the Corning Branch. In 2012, he became the Vice President, Branch Manager of the Jonesboro Branch. Mike was promoted in 2018 to his current position of Vice President of Branch Operations, Chief Services Officer.
Mike, a native of Kennett, was raised on a family farm near Holly Island in Clay County. He and his wife, Audra, have two children and they reside in Paragould. Mike enjoys spending his extra time with his kids in youth sports and is an avid hunter and fisherman.