Agriculture Reference
In-Depth Information
11
Financing the agribusiness
Objectives
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Discuss the reasons an agribusiness may choose to increase its fi nancial resources
•
Describe the alternative types of capital available to the agribusiness
•
Outline the various types of loans available to the agribusiness and the situation that
would cause the agribusiness to select each specifi c type
•
Explain how specifi c variables impact the annual percentage rate (APR) paid on a loan
•
Discuss the relationship between the agribusiness fi rm's tax rate and APR
•
Show the usefulness of the cash budget in making loan requests
•
Learn and apply the steps for developing budgets
•
Understand qualitative and quantitative techniques for developing forecasts and
budgets
•
Understand the usefulness of pro forma fi nancial statements in fi nancial planning
•
List some of the important external sources of fi nancing
•
Discuss leasing alternatives used in agriculture, including land, operating, custom hire,
and capital leases
•
Describe the means of generating capital funds internally and the importance of this
fi nancing alternative
Introduction
Cash is king. Proper cash management is the lifeblood of any agribusiness. Although money
itself is not capital, it represents the amount of capital a fi rm could control. Cash is needed
for fi nancing such assets as machinery and equipment, accounts receivable, materials, and
supplies. This is why the managers of an agribusiness are expected to be experts in cash
management.
Managers must make sure sales on credit (accounts receivable) turn into cash for the
fi rm, that inventories are maintained and sold to generate cash, and that cash is available
to meet short-term fi nancial commitments—both planned and those unforeseen. Whenever
and wherever fi nancial resources are secured, money is used in the enterprise with the full
expectation that it will be returned with a profi t. This profi t-making ability is essential for
the viability of the fi rm, and the manager who lacks this expertise will fi nd the agribusiness
hard pressed for funds.
There are three sources from which the manager may raise the funds needed to operate an
agribusiness: (1) investment by owners, (2) borrowing, or (3) funds generated by profi ts and
retained in the business. In most medium-to-large businesses, the major source of funds
