Be sure to always seek your CPAs financial expertise. Your relationship with your CPA will not only save you heartburn but could save your farm. We can not stress how important it is for you to be in communication with your CPA on your balance sheet. All lenders like to see a strong working capital position. Working capital is your current assets (cash, receivables, and inventory) minus current liabilities (line of credit, payables, and current portion of long-term debt). This measures your operation’s ability to meet current obligations.
As many of you get done with fall harvest you may want to work with your CPA to evaluate your balance sheet. if working capital is negative you should see if you are in a position to restructure your balance sheet. Below are some important financial ratios you should always be up to date on:
- Current Ratio. This measures your ability to pay debts. It divides cash and assets you can quickly sell by payments owed over the next 12 months. A ratio of 2 is considered excellent, 1.5 is fair, and 1 is weak.
- Debt-to-Asset Ratio. This ratio of the portion of farm assets owed to creditors also looks good. Anything lower than 30% (.3) is rated excellent, 30% to 60% is fair, and above 60% is weak.
- Rate of Return on Equity. This measure of net farm income (minus unpaid family labor) over farm net worth already raises a red flag.