FINANCING THE AGRIBUSINESS

FINANCING THE AGRIBUSINESS. Reporters: GROUP 3 Abdulgani , Jahnanur Abdul Cader , Asrin Casimra , Abdulhalim Macadato, Farhan ( Leader) Zacaria , Kiram.

Reasons for increasing Financial Resources. By: Kiram Zacaria.

The ultimate reason for increasing the financial resources of an agribusiness is to increase its revenues, and ultimately its profits, by generating additional business. Extra funds are used for general purposes, to increase liquidity or the cash position or for expansion and growth. The most important use for additional financial resources is for expansion. (Short-term or long-term expansion).

Determining when financial resources should be increased.

DETERMINING WHEN FINANCIAL RESOURCES SHOULD BE INCREASED.

DETERMINING WHEN FINANCIAL RESOURCES SHOULD BE INCREASED.

Kinds of Capital and Loans Cost of Capital By: Farhan Macadato.

8. Four (4) Types of Capital. Short-term loans Intermediate-term loans Long-term loans Equity capital.

Short-term loans are generally defined as loans for one year or less..

The Cost of Capital. By: Farhan B. Macadato.

Several other factors affect the net cost of borrowed capital: 1. Repayment terms and conditions 2. Compensatory balances, points, and stock investments 3. The income tax bracket of the firm.

Repayment terms. The repayment terms and conditions directly affect the rate of interest that is actually paid. If someone borrowed $100,000 for one year at the stated interest rate of 8 percent, the amount of interest paid would be $8,000. At the end of the year he would pay the lender $108,000, and his interest rate would have been the same as the stated rate of 8 percent because he used the entire $100,000 for the entire year. This type of interest is called simple interest . The formula for simple interest is: Amount of Interest Paid / Amount of Available Capital x 100 =Annual Interest Rate $8, 000 / $100, 000x100 = 8%.

Discounted loan Amount of Loan – Amount of Interest Paid =Amount of Available Capital $100,000-$8,000 = $92,000.

Compensating balance: Amount of Loan – Balance=Amount of Available Capital $100,000-$20,000 = $80,000.

Compensatory balances, points, and stock investments.

. Compensatory balances, points, and stock investments.

Compensatory balances, points, and stock investments.

The income tax bracket of the firm. The income tax bracket of the firm: The following tabular information is used to illustrate the impact of interest paid on the after-tax cost of borrowing:.

The income tax bracket of the firm. The difference between the two situations is $6,000. The effective interest rate for decision- making purposes is then only 6 percent. The formula is: After-tax Cost = Before-Tax cost x (1.0 - Marginal Tax Rate) After-tax Cost = 8% x (l.0 - 0.25) = 6%.

The Leverage Principle. Leverage is the concept of financing through long-term debt instead of equity capital. ..

In conclusion, all the companies need to maintain a balance between Debt and Equity funds. The ideal debt-equity ratio is 2:1, only then it can be assumed that the company can cover its losses adequately..

Determining how much the agribusiness should borrow By: Asrin Abdul Cader.

The question of how much an agribusiness should borrow is one that agribusiness managers frequently ask. Some answer by saying, “All I can get,” while others say, “Let’s pay off the mortgage and eliminate our long-term debt..

These philosophical generalizations are not adequate for determining how much an agribusiness should borrow. The good manager always establishes criteria and a frame of reference for such decisions. This section will deal primarily with intermediate- and long-term debt, since it is assumed that short-term debt will be paid off from conversion of current assets to cash..

25. Two factors are considered the primary inputs for debt servicing:.

For example, if Doug Davies has a net operating income of $50,000 and depreciation of $25,000, he has a preliminary total of $75,000 in cash. Depreciation is added to net operating income, because it is a noncash operating expense that is subtracted from gross margin (profit) to calculate net operating income. However, the depreciation expense is not paid to an entity outside the firm, so those dollars are available to pay debt obligations. For debt servicing purposes, he would have to deduct $8,000 in interest expense, $25,000 in taxes, and $5,000 for stock dividends, which would leave the firm with only $37,000 for debt servicing:.

Want big impact? Use big image.. 27. Net Operating Income Depreciation Total Cash Available Interest Income Tax Dividend Total Cash Required Amount Available for Debt Servicing: $50,000 25,000 $75,000 8,000 25,000 5,000 $38,000 $37,000.

Several other factors must be considered as borrowing capacity. Debt servicing costs can be extended above the accepted upper limits if:.

Other tools for financing decisions. A cash flow statement is really a projection of the firm’s cash inflows and outflows for a future time period A budget is a specific forecast of financial performance that is used as a tool for not only control of a business, but also for determining future borrowing needs and repayment schedules short-term budget is generally one that will be implemented within a year, and it usually requires shorter reporting periods A long-range budget is two or more years in implementation and is usually reported on a semiannual or annual basis..

BUDGETS AND FORECASTS. What is the difference between a budget and a forecast? Though it is true that some budgets are forecast and some forecasts are budgets, in management a forecast generally refers to some prediction of the future. We may have a forecast for the general economic situation, or a sales forecast for a specific territory. (As indicated above, the budget is typically a specific forecast of financial performance that is used as a tool for control and to project cash inflows and outflows..

Pro forma financial statements. The pro forma financial statements will provide a look into the future of the business and will help the manager determine what the financial needs of the business will be during and at the end of the operating period. If Doug fails to use this tool, he may not recognize problems until they actually arise, and then it may be too late to take corrective action. The most important figure in the preparation of these pro forma statements is estimated sales..

32. Table 11.3 Pro forma monthly income statementl PRO MONTHLY For the Month Ending— Sales Revenue Cost of goods sold Gross margin Operating expenses: Selling expenses General expenses Total operating expenses Net operating income Other expense: Interest expense Net income before taxes Income taxes Net income after taxes Earnings withdrawn Retained earnings Figures Based On: Sales forecast for the month Sales forecast, historical data Budget for the month Sales forecast, historical data Outstanding debt, expected additional debt Tax mte Owner's Intentions.

33. Table 11.4 Pro forma balance sheet PRO FORU4 BALANCE SHEET As of— Assets Current assets: Cash Accounts receivable Inventory Total current assets Fixed assets Total assets Liabilities Current liabilities: Notes payable Accounts pavable Accrued liaülities Total current liabilities Long-term debt Total liabilities Owner 's Equ Paid-in capi Retained eamings Total otxner's equity Total liabilities and ovvner's equity- Figures Based On: Desired cash balance Average collection period Monthly inventory turnover for the Present figure adjusted for period' s depreciation and any planned invesünents Amount of borrowed ftnds needed to balance assets with equities Expectation of number of days' purchases on the books Same as preceding period Expected and additional borrowings Present amount plus period earnings to be retained.

External Sources of Financing By: Abdulhalim Casimra.

External Sources of Finance. There are a multitude of sources of capital available to any agribusiness. Some of these sources are used only in specific situations, while others are used more routinely..

Trade Credit. Is one of the most neglected sources of capital available to agribusinesses managers. It is the credit advanced by suppliers and vendors of the agribusiness firm. If the agribusiness is creditworthy, most suppliers and vendors will allow credit terms..

Commercial banks. Are the major source of borrowed funds for most agribusinesses, with the exception of trade credit. Commercial banks usually offer a full line of banking services, including checking accounts, savings accounts, and loans..

Insurance Companies. Are always looking for places to invest funds they have collected from policyholders. Most insurance companies are interested in intermediate- and long-term loans on fixed assets, such as equipment or real estate..

Commercial Finance Companies. Are those finance companies that specialize in business and commercial loans. They are not to be confused with personal finance companies, which make loans to individuals..

Cooperative Borrowing. The cooperative patrons, who are also its borrowers, own these special banks. The bank makes short-, intermediate-, and long-term loans to its members. To receive a loan, a cooperative must purchase an amount of membership stock that is equivalent to the amount of money being borrowed..

Internal Sources of Financing By: Jahnanur Abdulgani.

Internal financing for the agribusiness. One of the most important sources of capital is the money obtained from retained earnings. Some managers fail to fully understand the importance and role of retained earnings. It is not that a manager lacks awareness of these funds, but because he or she simply has not used the financial tools and techniques previously described, he or she has no idea how to use retained earnings to the fullest extent..

43. Equity capital represents funds that are obtained by the firm through retaining the profits it has made, through the investment of more money by the owners, or through taking into the business additional people who are willing to risk their funds. In some small or new businesses, this may be the only alternative for securing capital funds..

Venture capitalist focuses on providing equity capital to new and high-potential businesses. These venture capital firms typically take an equity position in a firm that may be very risky, but be deemed to have major long-term potential. Many of the Internet start-up companies in the food and agricultural markets have venture capital backing..

Common Stock For the small company, this may mean selling shares of stock primarily to people who are known to the present owners. There are always people in any community who have funds to invest in a promising business venture. The firm’s banker can often be helpful in suggesting interested people. Employees of the firm are also a potential source of stock purchasers, especially if the firm offers a special purchase plan that grants employees preferential prices..

Preferred stock the stock to which a corporation shows preference. In the event of the liquidation of the corporation, the owners of preferred stock would be repaid before holders of common stock. Most preferred stock also has a definite annual dividend rate, which means that it would pay a percentage (say 6 percent) of the face or issue value on an annual basis. Sometimes corporations will reserve the right to defer this dividend until a later date should the corporation have financial difficulties..

Other Internal Financing. Partnerships may secure more capital by selling portions of their business to others who are willing to risk their money in the business. These others may be either general or silent partners. A general partner assumes the same rights and liabilities as other partners, while a silent partner has restricted rights and liabilities. Or an owner may simply lend money to the business just as any outside creditor would, if that owner does not wish to commit any additional funds on an equity basis..

THANK YOU!!! For further questions and clarifications message me here: FB: Farhan B. Macadato Gmail: [email protected].