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South Central Iowa | Your feed, prepaid seed, or whatever is converted on a balance sheet to its cash equivalent and that, along with the $5 in your wallet, is placed on the left side of the balance sheet and the liabilities due within one year are placed upon the right. Divide the right number by the left and it is converted to percentage form, divide the right by the left and it is the multiplier form, depends on the bank which they prefer. When the current liabilities are subtracted from the current assets, you get your current equity or working capital. This is always expressed in a dollar value and what is referred to by Grhog, myself, and others as dollars of working capital.
If you have too much working capital, that means that you are allowing term assets to accumulate interest while you possess things that are not necessary at the moment. To me, it makes more sense to pay down the long-term liability further and purchase the short-term assets on credit as you need them. The average duration of a dollar from my operating LoC is just over 7 months which makes my annual effective rate on the 5.5% note 3.2%. Why hold that cash upfront and pay 5.5% on $XXX,XXX in term liabilities? You shouldn't. If you need in the future, bring it back with an equity loan. | |
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How much working capital per acre does your lender want?
