Take the cash you have set aside, divide it by what one month of running the farm costs, and the result is how many months the farm could keep going if income stopped tomorrow. That number is called coverage, and you can work it out in one afternoon from records you already have. Many farmers watch the bank balance instead, and the balance shows how much money is there, not how long it would last. So when income slips (a sale falls through, rain pushes the harvest back, a buyer pays sixty days late), the shortfall comes as a surprise. It gets covered with the credit card, or by borrowing against next year’s crop before it is planted.
There is no standard number of months a farm should hold, so the figure has to come from your own records.
Why doesn’t the balance tell you how long the money lasts?
The balance is what sits in the account on one day. How long it lasts depends on how fast money goes out. Two farms can hold the same balance and have very different room to absorb a late payment, because one spends twice as much a month as the other. A large balance on a farm that spends a lot each month can last fewer months than a small balance on a farm that spends little.
That is why watching the balance rise and fall through the month tells you the account is moving, not how long it would last if nothing came in. You only see that once you divide the money set aside by the monthly cost.
What is coverage in months, exactly?
Coverage in months is the reserve divided by one month’s cost of running the farm. Months are the unit because, when a payment is late, the question a farmer or a manager asks is how long, not how much.
Say twelve months of records put the cost of running the farm at $20,000 a month, and the separate reserve account holds $60,000. Coverage is 60,000 divided by 20,000: three months. Both numbers are made up to show the arithmetic. Three months is not a target, and the numbers that matter are the ones in your own records.
The USDA’s Economic Research Service tracks farm liquidity with a working capital to gross revenues ratio, which compares the farm’s short-term cash cushion with a year’s sales. Dividing by cost fits the question here better, because when income stops, the bills keep coming. Coverage is one of the numbers that managing the farm as a business relies on, worked out from your own records instead of by feel.
What is the monthly cost of running the farm?
The monthly cost is the cash that actually left the account to keep the farm running over the last twelve months, divided by twelve. Two things stay out. Family spending is not a farm cost, and leaving it in makes the farm look more expensive to run than it is. The figure only means something once the farm’s money is kept separate from the family’s, a step another article in this library explains. Depreciation stays out too: it is a bookkeeping cost that no month pays in cash, and coverage counts only cash going out.
An average treats every month as equal, and on a farm they are not. The month the fertilizer or feed bill lands drains the account faster than the average suggests. Write the peak month beside the average, because in that month your money can run out sooner than the average says.
What counts as the reserve?
The reserve is cash set aside that you can reach this week, not whatever balance happens to be positive today. Two conditions make it real. It is kept apart from family money: if the household’s credit card is paid from the same account, part of that balance is already spoken for. And it is a figure you have checked against the bank statement, not a running total in a notebook; another article here shows how to match your cash balance to the bank line by line. Only a figure that matches the bank can be trusted in the week you need it.
A machine or a field you would have to sell to raise cash is not part of the reserve. Whether the farm owns more than it owes is a separate question, answered by the balance sheet, and mixing the two hides how long the cash lasts.
| Side | Goes in | Stays out |
|---|---|---|
| Monthly cost | Cash that went out to run the farm, twelve months divided by twelve | Family spending; depreciation and other non-cash costs; one-off purchases of machines or land |
| Reserve | Cash in a separate account or a savings deposit you can draw on within days, checked against the bank | Family money in the same account; land or machines you would have to sell |
Why is it a measured number and not a target?
The right reserve depends on the farm, and no general rule sets how many months to hold.
Farms also seem to size their reserve to their risk. In a 2025 article in the Journal of Economics and Finance, Allahverdiyev, Rao and Trujillo-Barrera used farm data from nine US states over 1995 to 2019 and found that the liquidity reserve farms hold rises with their business risk. Their result describes farms on average, not the right figure for yours, and it is one more reason to measure your own reserve instead of chasing a number someone hands you.
When does the number mislead?
Coverage tells you how long cash would last if income stopped, assuming the reserve stays within reach and untouched and monthly costs stay near the average. Either assumption can fail. A reserve moved into something you cannot draw on quickly no longer counts. A month with a heavy input bill drains faster than the average, so coverage worked from the average makes the cushion look longer than it is in the worst months.
Coverage also says nothing about debt. A farm with many months of cash can owe more than it is worth, and a farm with little cash can be sound on paper and simply short this quarter. Coverage compares cash on hand with spending and nothing else, so a comfortable figure does not mean the farm is safe.
What does the number change?
If you work out coverage before the year starts, rather than in the middle of a shortfall, you can see which risks you are taking. A buyer asking for ninety days to pay looks different against three months of cash than against two weeks. Whether to sell earlier, whether a late harvest means reaching for the credit card, whether the farm can ride out a bad year on what is set aside: you still make those decisions, and the number guarantees nothing. It only means you find out before the trouble, not in the middle of it.
Where to start
It takes one afternoon, twelve months of bank statements and a calculator, with no software or bookkeeper. By the end you have one page with the monthly cost, today’s reserve and the coverage in months, each figure dated and sourced.
The figure you end with is not a verdict on the farm. It is how long you could hold out, worked out before you need to know. Other articles on farm money are in the finance section of the library.