Liquidity and Meeting Cash Flow Requirements Ensuring liquidity and adequate cash flow is the same as ensuring the farm's ability to survive shortfalls in net income relative to various cash obligations. Assets classified as current on the balance sheet are assets that can be converted into cash within one operating cycle of the farm business, usually 12 months. Liquid assets include instruments that yield cash directly or that can be converted quickly to cash. Liquid assets include instruments that yield cash directly or that can be converted quickly to cash. Liquid assets include cash on hand, supplies, and crops and livestock to be sold within the year.
Adequate liquidity is essential to ensure a sufficient cash flow.
Also, adequate liquid reserves can facilitate contingency plans for production disasters or poor market conditions. However, excess liquidity typically generates lower rates of return than fixed assets. Timing is critical for ensuring adequate cash flows. With proper planning of expenses, cash flow needs can be known with reasonable certainty. This allows you to plan marketing decisions in advance and to take advantage of attractive pricing opportunities.