One measure of liquidity is your current ratio. The current ratio is a comparison of current assets to current liabilities. Current assets are assets that will normally be liquidated in the next 12 months. Current liabilities are obligations, such as your operating note and the principal due on term notes within the next 12 months.
Generally, lenders like to see a current ratio of 2: 1, which means that you have $2 of current assets for each $1 of current liabilities. The 2:1 ratio indicates that you will have little problem meeting your debt-service needs in the coming year. Dairy producers can operate with a little lower current ratio than other agricultural producers because you receive regular monthly milk checks. Dairy producers enrolled in the Illinois Farm Business Farm Management Association reported a median current ratio of 1.55:1 for the period of 2003 through 2006. The top 25 percent of Illinois dairy producers reported a current ratio of 3.08:1!
When you look at the financial standards listed here, don’t get hung up on the fact that the examples used are from Illinois producers. Whether your business resides in California, Wisconsin, or Illinois, it doesn’t really matter. Just remember that your best comparison comes from results reported by fellow dairy producers.
Take some time to assess if your business is making progress. Then, apply these measures and develop a plan to improve your financial position going forward.
Darrell L. Dunteman is an agricultural financial consultant and accountant in Bushnell, Ill. He also edits the Farm and Ranch Tax Letter, a monthly agricultural tax newsletter. E-mail your questions to Dunteman at: email@example.com