How Do Farmers Maintain Adequate Working Capital?

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How Do Farmers Maintain Adequate Working Capital?

India’s rich agricultural heritage has been producing wheat, rice and several other staples for most of the world. However, the same sector has been experiencing narrow profit margins in the recent past and has made it difficult for the farmers to extract working capital.

What is Working Capital?

Working capital or the financial needs for day-to-day activities is the differential amount between a business' present resources and liabilities or financial obligations. Working capital fills in as a measurement for how productively a business is working and how stable it is financially. The functioning capital proportion demonstrates whether a business has satisfactory income to cover transient obligations and costs.

How Is It Calculated?

Working capital types can vary based on the sector, and in agriculture, it can be acquired from a farmer’s accounting report. Current resources incorporate money, records of sales, inventories of grain and farm animals, information sources or assets to be utilised—such as feed, compost, synthetic substances and fuel—and the money used to cultivate harvests. Current liabilities incorporate records payable, taxes, interest accrued on unpaid dues, credit lines and payments due on long-term advances.

What Are the Uses of Working Capital in the Agriculture Sector?

Working capital acts as a financial reservoir that a business requires to rapidly react to instant monetary needs just as to make the most of opportunities. It gives a cushion to a monetary slump that may impede the business' capacity to purchase raw materials required to work and support their families and other obligations.

Productive working capital administration keeps up with smooth tasks and can likewise assist with working on a farmer’s profit and loss. The working capital management involves calculating stock administration and accounts receivables and payables. The fundamental goal of working capital administration incorporates guaranteeing its readiness, limiting the expense of capital spent on the working capital and expanding the profit from current sources.

How to Acquire Working Capital Funding?

When a trade creates income from sales, it may very well be held in that structure as it is, focused on the acquisition of raw material for the impending harvest season, or it tends to be utilised to buy fixed capital or withdraw from the business for emergency cash needs. Buying resources or pulling out cash from the business might be important in desperate times. However, it is critical in the present climate to painstakingly screen the uses of money because their utilisation can essentially decrease the fluidity of the business. Different strategies to save money and obtain working capital funding are to rent capital resources, to lessen consumptions that don't add to capital creation, to further develop yield through ideal activities and to sell harvest at a higher cost.

Some of the working capital improvement solutions in agribusiness are as follows:

Restructuring debt: This helps in delaying the immediate payment obligations and moving them to the long term to reduce the burden of scheduled payments.
Asset management: This helps in analysing whether farmers can maximise their assets or whether their assets are justifying their continued ownership?
Leasing vs owning: This helps farmers understand the fundamental difference between the two and check whether working capital can be freed up by a lease vs an ownership arrangement.
Downsizing: Since the profit margins are syncing, is it time to surrender minimally used land or resources? On more slender financial occasions, it is important to fabricate or replenish working capital.

As agribusiness keeps on changing, so do the financial needs. Financial advisors at Kotak Bank can help individual farmers to apply for working capital loan for all their instant needs.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.