Agriculture Reference
In-Depth Information
(over 50 percent) is the owner's equity in the fi rm (also called “owned capital”). The larger
the company, the more it depends on owner's equity as a source of funds. One major reason
for this is that larger companies usually enjoy access to public offerings for their stock or
equity, and possess the ability to attract investors, a situation that is not shared by smaller
companies. Whatever the kind or size of a business, its ability to generate profi ts will
ultimately determine the amount of funds that are made available for its use.
Reasons for increasing fi nancial resources
The ultimate reason for increasing the fi nancial resources of an agribusiness is to increase its
revenues, and ultimately its profi ts, by generating additional business. Extra funds are used
for general purposes, to increase liquidity or the cash position, or for expansion and growth.
An agribusiness may fi nd that its funds are tied up in current or fi xed assets and that it is
unable to meet its day-to-day obligations. Bills cannot be paid with such non-liquid assets
as accounts receivable, inventory, new orders, or a piece of equipment. Consequently, an
agribusiness requires working capital in the form of cash. The principal source of cash must
be the revenue generated by the business itself, but in short-term situations additional cash
may be required to meet the day-to-day obligations of the business. This is particularly true
of the many agribusinesses that are highly seasonal in nature. In this case, cash funds can
become tied up in inventory and in accounts receivable, which will not be turned into cash
until some later date. As a rule, many agribusinesses fi nd it advisable to keep on hand enough
cash to equal 20 to 25 percent of the amount of their current liabilities. This helps ensure the
fi rm's ability to make short-term payments as well as any unexpected obligations.
The most important use for additional fi nancial resources is for expansion. Expansion can
require either a short- or long-term commitment of funds. Short-term expansion involves
such factors as increased labor, inventories, and accounts receivable. Long-run expansion
encourages more ambitious projects, such as the purchase of new equipment, buildings, and
land. The objective of increasing the
capital
of an agribusiness is to increase its sales volume
and revenues, and consequently its profi t, through the shrewd application of increased
assets. Capital, or the fi nancial resources of a business, comprises in its broadest sense all
the assets of that business, and represents funds provided by the owners of the fi rm and the
contributions by outsiders.
Determining when fi nancial resources should be increased
As an agribusiness manager considers the possibility of acquiring additional fi nancial
resources, several questions should be asked and carefully answered:
1.
Why are additional funds needed?
2.
How does the use of additional funds fi t with the overall mission of the business?
3.
What increases in revenue, profi t, and/or net cash fl ow will be generated by the addi-
tional funds?
4.
What sources are available to provide additional funds?
5.
How much will these additional funds cost the agribusiness?
6.
How much is needed in the way of additional fi nancial resources?
7.
When is this increase in revenue fl ow expected?
8.
When will these additional funds be needed?
9.
For what time period will these additional funds be needed?
