The Rural Voice, 2000-01, Page 31Liquidity, Combe defined as:
"Can I pay my bills when they come
due?" Two ratios measure liquidity:
the Current Ratio and the Working
Capital, both of which are
determined from your balance sheet.
Current Ratio is the current assets
divided by the current debt. Working
Capital is current assets minus
current debt.
Afarmer with ,good working
capital can often be more
profitable because he can take
advantage things like of suppliers'
cash discounts and bulk purchases to
reduce his cost of operation.
A farm with a working capital
ratio of over 50 per cent of the annual
expenses rates a green "go" signal
from Kohl. A farm with 20-50 per
cent should be cautious. A farm with
under 20 per cent working capital to
annual expenses earns a red light in
Kohl's scale.
Solvency indicates how much
debt the farm can handle. Equity is a
measure of solvency. If you were to
sell all of your assets and pay back
all your debt. what is left over is your
equity.
Equity= assets-debts x 100
assets
Equity is measured by dividing
assets, minus debts times 100 by
assets. A farm should have at least 50
per cent equity but 100 per cent
equity isn't necessarily a good sign
either, Combe says. "If you're 100
per cent because you'd afraid to
borrow, you're stagnating," she says.
Those with low equity are often
people just starting out. To survive
with less than 50 per cent equity you
need outstanding skills.
1. The farmer must be in the top 25
per cent in managing production.
2. The farmer . must be a top
marketing manager.
3. There must be good cost control.
4. Family living expenses should be
less than 10 per cent of revenue. (If
you have low equity and high
operating expenses you're in big
trouble, Combe says.)
5. Debt structure needs to be such
that debt payment to adjusted income
is under 30 per cent.
6. You need luck.
"There's no room for problems,"
she says.
Profitability Analysis: The term
N. Bank of Montreal
IT is POSSIBLE°
Pat Bruce
293 10th St.
Hanover
519-364-4102
Michelle Wilhelm
131 Durham St. E.
Walkerton
519-881-1311
Account Managers
Jointly .S'ee'ing
Your Community
INCOME
TAX
SERVICE
• farm. business, or personal
• complete year-round service
including tax audit
representation
• E -File available
Over 18 years' experience
Quality work
at reasonable rates
"FREE CONSULTATION"
Stephen
Thompson
R.R. #2, Clinton
482-7551
�`' FARM MUTUAL
AN
SERVICES INC.
"FOR ALL YOUR INVESTMENT & INSURANCE NEEDS"
TOLL FREE 1-888-690-9999
Sholdice Insurance Ltd.
Doug Sholdice
Brussels 887-6100
Keil Insurance Brokers
Stephen Wiffen
Guelph 836-2700
Wingham 357-2636
Brown Insurance
Paul Brown
Palmerston 343-2663
Keil Insurance Brokers
Murray Musty
Gorrie 335-3525
"CALL TO INVEST YOUR RRSP'S NOW"
Nancy Anderson, Frank Heisz CFP, Joanne Kuhl
Branch Office
364-4848
267 10th St. P.O. Box 20002, Hanover, ON N4N 3T1
JANUARY 2000 27