Financial Ratios Part 3 of 21: Working Capital to Gross Revenues
What is the Capital available vs. the size of the farm or business?
Financial Ratios can assist in determining the health of a business. There is a minimum of 21 different ratios that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios.
The Working Capital to Gross Revenue Ratio is a measure of liquidity and is determined based on information derived from a business’ or farm operations balance sheet. The term liquidity refers to the ability of a business or farm operation to meet their financial obligations of debt payments, taxes, and family living expenses. The Working Capital Ratio to Gross Revenues specifically measures the amount of capital the business or farm has with relation to the farm or business’ size.
To determine the Working Capital to Gross Revenues ratio you divide the Working Capital by the Gross Farm Income.
Working Capital to Gross Revenues =
Gross Farm Income
This ratio is measured as a percentage. The higher the percentage the more cash you have available to meet the short-term needs of the business or farm without the use of additional financing. Having a ratio above 25% puts a farm or business on strong footing. Anything less than that makes the farm or business at risk of needing financing to make it through the year due to market instability.
If you have any further question please feel free to contact your local Farm Management Educator or the author.Information for this article has been modified and gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).
You can read the other articles in this series:
Part 1: The current ratio
Part 2: Working capital.
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio