You can easily make this calculation for your own farm as you do some end-of-the-year benchmarking. Use your December 31, 2013 Balance Sheet and your Accrual Income Statement for the year ending December 31, 2013. On the Balance Sheet, find your current assets and subtract your current liabilities from the current assets. (Be sure to include the current portion of your deferred income taxes in your current liabilities.) Take that result and divide it by the value of farm production from your Accrual Income Statement. Now you have your answer! Think of WC/VFP in terms of a percentage. If your WC/VFP is 0.60, then you have 60% of the years' revenue in a very liquid position for your operation. Among other things, this liquidity can provide cash to purchase operating inputs or make capital purchases. In 2012, the median WC/VFP was 0.68 for a group of grain farms in the Illinois FBFM database. For that same group of farms at the 75th percentile, the WC/VFP was 1.04. The value of the ratio can vary throughout the production cycle. It is typical to measure WC/VFP at the same point in the cycle (December 31) to better compare the ratio from year to year.
- WC/VFP is varies with the age of the farm operator. For those over age 30, as age increases, the WC/VFP at the median and the 75th/25th percentile increase as well. (See the 'By Age' table.)
- WC/VFP also tends to increase with the tenure ratio. As one owns' a more substantial portion of the land one farms, WC/VFP increases as well at both the median and the 75th/25th percentile.
- Farm type also impacts the WC/VFP. Dairy farms tend to carry lower levels of WC/VFP and lower levels of liquidity in general.
- When compared by farm revenue (VFP), WC/VFP tends to be lower at greater levels of farm revenue especially at the median and the 75th percentile.
Larger revenue farms with lesser levels of owned land would see a potential doubling up of the signs that would point to lower levels of liquidity via the WC/VFP ratio.
Click here to find other financial benchmarks for your farm.
It's been said before that 'cash is king'...monitor your working capital closely and spend it wisely knowing that it may be more difficult to build working capital in the future.
The authors would like to acknowledge that data used in this study comes from the local Farm Business Farm Management (FBFM) Associations across the State of Illinois. Without their cooperation, information as comprehensive and accurate as this would not be available for educational purposes. FBFM, which consists of 5,700 plus farmers and 60 professional field staff, is a not-for-profit organization available to all farm operators in Illinois. FBFM staff provide counsel along with recordkeeping, farm financial management, business entity planning and income tax management. For more information, please contact the State FBFM Office located at the University of Illinois Department of Agricultural and Consumer Economics at 217.333.5511 or visit the FBFM website at www.fbfm.org.
Source: Brandy M. Krapf, Dwight D. Raab and Bradley L. Zwilling, Illinois FBFM Association and Department of Agricultural and Consumer Economics