Working Capital and the Age of the Farm Operator

Abstract

Working capital captures much attention as 2015 financial records are brought to a close and balance sheets are prepared for the period ending December 31, 2015. Calculated by subtracting current liabilities from current assets, working capital is a measure of funds available to purchase inputs and inventory after the sale of current farm assets and payment of all current farm liabilities. Adequate working capital is related to the size (in dollars) of the farm business. Higher levels of working capital indicate a greater ability to withstand adverse financial conditions. Current assets include: 1) cash and cash equivalents; 2) crop, feed and market livestock inventories; and 3) prepaid expenses. Current liabilities include: 1) operating loans; 2) the current portion of intermediate and long term debt, 3) accrued real estate and income tax and 4) end-of-year accrued expenses. One shortcoming of working capital is that it does not take into account the access a farm operator might have to operating loans or other short-term financing sources.