With the USDA forecasting net income to be down nearly 32 percent and net cash income down 22 percent, greater emphasis will be placed on farmers’ and ranchers’ ability to maintain adequate levels of working capital in their operations.
If you’ve carefully considered and decided the time is right to invest in farm or ranch machinery or equipment, the next crucial decision is determining how you will pay for it – with cash, by financing or by leasing – and the effect each has on working capital.
Working Capital Defined
What is working capital? Simply put, it’s the sum of current assets minus current liabilities, according to Chris Steinkamp, a territory manager with AgDirect®. AgDirect is an equipment financing program offered by participating Farm Credit System associations of AgDirect, LLP.
“Working capital is a measure of liquidity,” Steinkamp says. “It tells lenders how much short-term risk-bearing ability the operation has to withstand adversity.”
Current assets include such items as cash, marketable bonds, accounts and notes receivable within 60 days, commodity trading accounts, market-ready livestock, crops and feed inventories, investment in growing crops and prepaid expenses.
Current liabilities include accounts payable within 60 days, operating notes, outstanding drafts or checks, credit card balances, accrued interest, the current portion of term debt outstanding and income taxes.
“When they review the farm or ranch operation’s working capital, lenders want to see a positive number, and the larger the better,” Steinkamp says. “Working capital can be viewed as another form of insurance, enabling producers to continue their businesses the next year. It’s the operation’s shock absorber.”
Preserve the Shock Absorber
Producers in the market for new equipment should consider the method of payment with that shock absorber in mind, Steinkamp adds.
“Even if you have adequate cash to fund a purchase, choosing to lease or finance that purchase – the choice depends on your tax situation – will enable you to preserve cash and enhance your working capital position,” he says. “Interest rates are still very favorable, but they are expected to go up. If you can lock in a low rate now by financing or leasing a piece of equipment, you can save cash for your working capital ‘shock absorber.’ And that’s what will help you weather lower margins and volatility over the longer term.”