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Using working capital to manage financial risk

Reference: FCC

Working capital is your first line of defence against financial risk. It helps businesses smooth out unexpected fluctuations in customer demand, the inability to deliver products or lower prices.

Working capital is measured by subtracting current liabilities from current assets. If you sold all your crop inventory, market livestock (not breeding stock) and realized your accounts receivable, would you be able to pay off your outstanding bills, credit lines and principal due within the next year? Most operations can answer yes to this question. It’s also desirable for the current ratio be large enough to cover possible unexpected changes in market conditions.
Figure 1 presents the average current ratios for four of Canada’s largest ag sectors - dairy, hogs, cattle, and grains and oilseeds. The ratios differ as they reflect each sector’s production cycles and risk profiles. Industries which sell product regularly throughout the year can handle a tighter working capital position.

Figure 1: Average current ratio: Dairy, hogs, cattle and grains & oils... Read More