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| The 'problem' with farming is that income can vary a lot year to year and debts don't usually adjust. Maizing is right about the banking situation and most accountants want debt spread out. It preserves working capital and can give a business more flexibility. Where it gets to be a problem is when we sign up for debts that are going to create a real hardship in lower income years. I wouldn't be surprised to learn that most of us run pretty 'close to the bone' if we didn't come into farming with a leg up (inherited land, favorable business transfer, etc). This means that in good times we can be a little more aggressive, but once things change it may be wiser to use up some WC and retire smaller debts so cash flow isn't as tight if there just isn't as much cash flowing.
As for increasing WC, making more money and spending less is how it grows. Moving expenses around can make an individual year look better, but it's just rearranging the same set of blocks and there isn't really an increase. Before we got into hogs and spent way more money than I could imagine at the time, we had excellent WC. Now I'm lucky if it isn't almost the same number but negative. You can imagine I'm a little tense about significant tax law changes (esp depreciation), because it wouldn't work otherwise. From my point of view, if you are working towards a profitable goal (ie. pay off of hog buildings that provide some cash during the loan period), WC levels are not a big issue to your business as long as you generally cash flow. It doesn't impress the banker, but I'm not looking to borrow money in significant amounts these days either (I already did). This is part of that 'scraping together payments' for a future gain thinking. It's a risk for sure, but I don't think you can grow a business and always maintain a pretty balance sheet either. Ok, none of that makes sense, I'll go do chores now. | |
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What are some ways a young farmer can build "working capital"
