Building on last week’s article, here is a look at how you can improve your working capital position and liquidity.

Working capital is the difference between the current assets and the current liabilities, which measure the liquidity of a business. 

The liquidity of a business is calculated with the current ratio. 

For demonstration, a current ratio of 2:1 means the business has N$2 of short-term assets in comparison with every N$1 of short-term liabilities. 

This indicates the ability of a business to meet its short-term obligations.  

Without working capital, farms may not be able to reinvest in their crop production or livestock growth. 

Additionally, this means farmers may not be able to pay their employees on time or reinvest in reliable new equipment. 

In a farming industry, as with any other, you need money to make money. 

A good working capital position is what helps you withstand economic storms.

Farming businesses without a good working capital run the risk of having fewer funds available for day-to-day operations, insufficient inventory of crops, less market livestock, fewer prepaid expenses, the likelihood of more unpaid bills and perhaps more operating debt.

However, there are a few ways agripreneurs can improve their working capital position:

Asset acquisitions

It is recommended that you limit capital purchases unless extremely necessary during these downturns. It is also imperative that you review the underutilised or obsolete equipment that could be traded for cash to add to your cash flow.

Asset management

Are your assets operating at an optimal level? Are they fully productive? What opportunities lie in optimally utilising your assets? These are reviews one needs to undertake.

Debt restructuring

What is the structure of your debt? Do you need to review and restructure your debt?

Reducing costs of operations 

Again, what is the set-up of your monthly operational farming expenses? Are there expenses that can be forgone?

 Ownership compared to leasing

There are options for freeing up working capital by looking at leasing versus ownership arrangements.

Inventory management

Inventory, as part of current assets, has a huge impact on your working capital. Here, you may review your inventory turnover and holding cost, depending on the farming type. 

 Creating and following a budget

Make sure that you create a budget specific to each farm enterprise. This would allow an agripreneur to see how each business unit is performing after reviewing the actual performance vs the planned.  

Family monthly expenditure reduction

The monthly family living expenses may also be reviewed to look at options for cutting down and freeing up some funds. Just to mention a few points, more options may be available.

Thus, for agribusiness to thrive beyond survival, it is important to understand the significance of farm financial management concepts, such as working capital and liquidity to ensure profitability and agribusiness longevity. 

- admin@simpliadvisory.com

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