| ||When it comes to measuring farm financial management, liquidity is one of the key measures.
“Financial risk can be broken down into three main financial management parameters: solvency, liquidity, and profitability,” says Rick Dehod, agricultural farm finance specialist, AF. “Liquidity the ability to convert assets into cash to meet operating demands, living costs and debt obligations in a timely manner.
“If a farm business cashed in all of its current assets would it have enough to pay off all of its current liabilities? How easy is it to convert those current assets into cash? Is it immediate? If it does and can, the farm is said to be in a liquid position.”
The amount of liquidity is also important for the long-term survival of the business. Being in a liquid position allows the farm to operate as required and have cash available to pursue opportunities and growth. “A farm may be profitable, but if you are unable to pay your bills in an orderly manner, you won’t be in business long.”
Other than selling an asset, cash can be obtained by borrowing against those current assets.
“This is often in the form of an operating loan, a cash advance or a line of credit,” says Dehod. “This provides the business the ability to carry inventory to take advantage of marketing opportunities or purchase inputs at opportune times. Cash is king, and trade creditors and banks don’t accept inventory as payment.”
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