Agriculture Reference
In-Depth Information
10. If the funds are borrowed, how will the indebtedness be repaid?
11. How will this indebtedness affect profi t?
12. How will this indebtedness affect liquidity and solvency?
13. What risk is involved that may delay the time period when funds may be repaid?
The manager who is seeking additional fi nancial resources for the agribusiness should use
the foregoing as a checklist to select the one alternative that is likely to be the most benefi cial
to the fi rm.
Davies Farm Structures, Inc.
Doug Davies started his farm-building company some 20 years ago with $1,000 in cash he
had saved plus $1,000 he had borrowed from the bank. Today, Doug's company is a corpo-
ration that is owned primarily by members of the family. Doug is currently investigating an
expansion opportunity, and his opportunity will be used to illustrate some of the decisions
involved in fi nancing an agribusiness.
Doug's current annual sales exceed $2 million, and although he now erects some com-
mercial and public buildings, his major source of revenue remains farm buildings of various
kinds. His workforce often exceeds 50 people. Recently, Doug was offered the opportunity
to purchase a small lumberyard in Roland, a town of 6,500 people. The lumberyard had a
yearly gross of over $750,000 and was earning 15 percent on owner equity and 5 percent on
sales in net income after taxes. Doug had used the fi nancial tools discussed in previous
chapters to analyze the business, and felt the lumberyard would be a great opportunity to
expand and integrate into his own business. He knew that he had two expansion alternatives:
either to expand his current operation or to diversify his business. He saw the lumberyard as
an opportunity to do both.
Doug analyzed a number of advantages. His analysis of the lumberyard revealed that it
could benefi t from an increase in inventory turnover. By combining his building company's
needs for lumber with the lumberyard's need for increased sales, he could increase the sales
volume of the lumberyard by about 70 percent. The added purchasing volume for the
construction company would allow him to buy lumber more cheaply because he could buy
it in greater quantities and in full carloads. He could also consolidate his storage and
handling operations and operate more effi ciently because he would be located on a rail
siding. His offi ces and entire operation could be moved to one location, and he determined
that combining the operation would result in lower administrative costs.
With savings in cost of goods sold and administrative expenses, along with more
operational effi ciency, he foresaw the potential of lowering the prices for both businesses
and being more competitive in both marketplaces. His projections showed that even if he
lowered prices by 5 percent and assumed existing sales volumes for the two operations,
he could maintain existing gross margins. But he hoped that the lowered price would help
sales eventually climb as much as 50 to 75 percent because of his strongly competitive price
position and his positive image in the farm structure business. At this point, the future looked
very bright for Doug and his family. They felt they had successfully addressed questions 1,
2, and 3: “Why are additional funds needed?”, “How does the use of additional funds fi t
with the overall mission of the business?” and “What increases in revenue, profi t, and/or
cash fl ow will be generated by the additional funds?” While Doug's own company was
in a very comfortable position fi nancially, he knew that he would have to secure added
fi nancial resources to purchase and operate the lumberyard. The balance of this chapter will
