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Know your current ratio!
Your doctor looks to certain measurements such as blood pressure, pulse rate, cholesterol levels etc to determine how your physical health compares to that of a healthy individual. As a result of these tests your doctor may prescribe some changes to your lifestyle or medication to help improve your health rating and lower the risk of a major health issue in the future.
There are also standards that can be used to measure the health of your farm business that can help guide business decisions to ensure that your farm can survive periods of financial stress. COVID-19 presented itself as a human health issue, however it has also very quickly morphed into a serious financial pandemic and no one really knows how long or how deep this recession will be.
There are many types of ratios to measure business health, but one of the most common ones is the current ratio. It is calculated by taking your current assets divided by your current liabilities. This ratio measures a business' ability to meet financial obligations as they come due, without disrupting normal operations. In general a farm with a ratio of 1.5 or greater is considered healthy. A ratio of 1 to 1.5 is still liquid but indicates that the business could be vulnerable to cash flow difficulties if markets or production are under pressure. A current ratio of less than 1 indicates that the farm does not have adequate current assets to cover short-term liabilities. In this situation it may force the operation into finding other methods of repayment, such as refinancing debt or even selling assets.
This is just one of several ratios that can give you valuable information about the health of your operation. If you are interested in getting a financial checkup for your farm, please give us a call.