This fall it has been energizing to engage with hundreds of ranch business owners from across North America through the Executive Link Program we lead, as they tackle tough challenges and exciting opportunities in their businesses. At our fall Executive Link (EL) meeting we do a ½ day continuing education program. This time John Haskell of Ranch Right LLC, provided a practical and engaging session on how to develop some simple and powerful metrics around financial reports. One he discussed was “Days of Working Capital”. John showed participants how to calculate, and more importantly, the power of this metric. In short, “Days of Working Capital” is how much cash you could get your hands on in 30 days, divided by the total daily expenses to operate the business. The target John suggested is to have 150 days of working capital on hand.
Too many ag businesses are running well below this 150-day target. This ratio could also be called the “How well are you sleeping ratio” or “How stressed are you about the business ratio”. When access to cash gets tight, stress around the business goes up. Running out of cash to run the business is like having a vehicle, but not being able to put gas in it. Everything comes to a halt and getting work done gets very difficult.
Having access to cash for your business to operate gives you options. If you’re in a drought, you have choices. When the next black swan event strikes the market, you have options. When an opportunity presents itself, you can strike.
Having a line of credit isn’t the same thing as having access to cash. When things get interesting and opportunities and challenges arise, it is often at the same time banks tend to freeze operating money.
Do the math for yourself and figure out your days of working capital. How much cash could you put your hands on with 30 days notice? What is the daily burn rate of your business (This number is likely to surprise you)? How many days of working capital do you have? What is your target? How do you plan to get there?
We are just a couple of weeks away from beginning our busy season, delivering Ranching for Profit Schools. Between now and February our team will deliver 8 Ranching for Profit Schools. Many of these are already sold-out and the rest are nearing sold-out. If you want to attend the Ranching for Profit School this winter you had better get registered now. If the closest school is sold out, you would be well served to travel to attend another one rather than wait a year. In fact we encourage you to travel to a Ranching for Profit School. Our week-long curriculum is the same regardless of the school’s location. Some think a school closer to them might make travel a bit easier but being an easy drive to your ranch can be distracting. Ranchers have a harder time focusing on solving the $100,000 issues facing their business because they are sidetracked by putting out the fires back at home. Head over to our school schedule and find school happening on a week you can get away from the ranch.