Financing the agribusiness - Agribusiness Management - page 260

possibly go wrong, it will.” The risk can be lessened considerably if the manager's profi t
forecast is understated. For example, if Doug feels that he will add $10,000 to his debt
servicing capability through the loan, for the fi rst year, at least, he would be advised to
actually fi gure on only half this amount, or $5,000, as available for debt servicing.
Several other factors must be considered as Doug analyzes his borrowing capacity .
Debt servicing costs can be extended above the accepted upper limits if:

1. Investors agree not to withdraw funds if the fi rm faces adverse market or competitive

conditions

2. The fi rm has a favorable debt-to-equity ratio (solvency), or large amounts of working

capital

3. The fi rm has fi xed assets that can readily be converted to cash without incurring large

losses

4. There are redundant fi xed assets that can be sold

5. There is a low risk on the asset purchased, as, for example, with a new piece of

equipment that will save labor

If accelerated depreciation or special depreciation measures are used to increase the amount
of depreciation that is taken each accounting period, then the amount available for debt serv-
icing must be considered in that context, and the manager may want to increase the amount
of this particular contribution to debt servicing. However, if the long-term plans of the fi rm
will not result in those levels of depreciation continuing during the remainder of the term of
the loan, the debt servicing ability in the future may be more limited than in the short term.
Finally, the manager will want to take a long, hard look at the overall stability and success
of the fi rm and of its management team. Such factors as profi ts, control of inventories,
accounts receivable, asset turnover, and effi ciency will be the fi nal elements in determining
the amount of capital that the fi rm should borrow.

Other tools for fi nancing decisions
Two other techniques, or tools, play an important part in fi nancing the agribusiness fi rm.
These are the cash budget, or cash fl ow statement, and pro forma fi nancial statements, both
of which can help the agribusiness manager to look ahead intelligently and can aid the deci-
sion-making process immeasurably. Both of these tools were introduced in Chapter 9 , but
will be explored in more detail here.

Cash fl ow statement

A cash fl ow statement is really a projection of the fi rm's cash infl ows and outfl ows for a
future time period ( Table 11.2 ). It allows the manager to estimate the amount of cash needed
to take advantage of cash discounts, to fi nance seasonal demands, to develop sound borrow-
ing programs, to expand, and to make plans for debt servicing.
The length of time covered by a cash fl ow statement depends on the unique nature
of the agribusiness. The primary considerations are the current supply of cash, the
distributions of transactions throughout the period and the seasonality of cash infl ows and
outfl ows for the business. Highly seasonal agribusinesses will need to prepare their
cash fl ow statements over longer periods of time than those whose business activity is fairly
constant.