A32-Lancaster Farming, Saturday, June 22, 1991
I
I
F
A
R
MANAGEMENT
DEBT
REPAYMENT
CAPACITY
Roland P. Freund
Farm Management
Agent
Editor’s note: This is the
fourth of an eight-article series
written by the five southeastern/
central Penn State Extension
farm management agents.
Debt management is an impor
tant key to the financial success of
a business.
Back in your grandpa’s day,
people viewed debt as evil, and
tried to pay it off as quickly as pos
sible. Some who were not able to
do so lost everything in the Great
Depression.
Twenty years ago, it was sug
gested that lots of debt waSthe way
to get rich. Recently Donald
Trump and others have found that
this philosophy can lead to major
liquidity (cash flow) problems.
Fortunately there are ways to
determine how much debt can be
carried by each business operation.
But be careful of common “rules of
thumb” such as $3,000 per cow.
These can be very misleading. To
be safe in our estimations, we need
to look carefully at our own busi
ness records and analyze them.
Tax records are the IRS system
of accounting. They pay no atten
tion to your actual or scheduled
debt principal payments. In place
of these they allow you to claim
“depreciation” on some of your
capital assets, but never on land.
So we need to make some adjust
ments to our records to see the pic
ture more clearly.
What is
available to
pay debt?
We can start with net cash farm
income. This is calculated as cash
farm income (and includes income
from routine capital sales such as
cull breeding livestock) minus
cash operating expenses (without
depreciation). To this we should
add nonfaim income to calculate
cash available. But first the family
has to live on this income, so we
deduct family living and deduct
income tax and social security pay
ments. Now we have cash avail
able for principal payments.
Debt repayments normally
include principal plus interest
components. So now we must add
back from our expense statement
the amount of farm interest paid.
This is now the amount available
for principal and interest
payments.
Operating loans
Since line-of-credit and operat
ing loans have payments which
must be met, these have to be con
sidered. The operating expenses
should account for the principal
payments, so we only need to
deduct operating loan interest to
find out how much is available for
our scheduled or amortized debt
payments.
When capital items (machinery.
etc.) are purchased with operating
loans, it throws our accounting
system and our formulas into a
tither. Because this loan should be
repaid in less than one year, we
must further reduce the cash avail
able for scheduled payments by the
cost of the capital purchase. This
often brings up the “sorry, no-can
do” signal.
Capital Leases
Leases of capital assets may
bypass the bankers veto, but they
still have to be paid. They can be
ULTRAFLO OUT-PERFORMS CHAIN
IOWA PROVES IT*
FEED SAVINGS: On-farm results show a feed savings of Vfc
lb. per 100 birds per day - over $lO,OOO per year savings
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EASY ADAPTABILITY: Ours adapts easily to
existing cage systems you may already have. Or
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5-YEAR WARRANTY: Our* gives you a
5-year warranty on auger and trough. Their*
doesn’t. In fact, their dealers derive a large
percentage of their income from parts sales.
Ours don’t.
MICROPROCESSOR CONTROL;
Our control lets you program feeding
time to the eecond, to match the
exact time of one circuit. Control
number of feedinge, time of each
feeding - also 10-second “Stimula
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2-**— *
SIMPLE OPERATION:
“Push-pull” Power Units
with l /a or Vz HP motor are
located in a cage, have
hardened steel gears for
trouble-free operation
Watering Prom
FOR MORE INFORMATION CALL OUR TOLL FREE N
treated as an operating expense, or
they can be included with the sche
duled debt payments. In both cases
they will reduce the amount of
money available for debt
repayment
Term Debt
and Capital Lease
Coverage
If we work through the above
computations, we can calculate
how much money is available to
cover debt and/or lease payments.
We can compare this with what is
needed to cover these same pay
ments and see if we have enough.
For some reason, analysts like to
use ratios. So they divide the pay
ment dollars available by the pay
ment dollars required. If this
results in a 1:1 ratio, there is no
margin for drought, disease, or
other management problems. The
higher it is, the better.
If the ratio is less than 1:1, then
refinancing is a temporary solution
possibility. In many cases it may
be necessary to liquidate assets to
reduce debt.
Chore-Time's ULTRAFLO* feeder
for layers f pullets and breeders
We have probably been too modest up to now about the merits of our new generation
ULTRAFLO® cage feeder vs. the old style chain feeders some of our competitors are
still trying to sell you. In fact, the only negative comments about our feeder come from
our competition, not our customers. So we would like to point out the bare facts;
Mf
Get The
TROUBLE-FREE DESIGN: Our feeder has only two moving
parts - the one-piece auger plus each drive wheel; their chain
has more. Our comers are heavy 12 ga. zinc plated tubing for
long life; their comers have a reputation for trouble and short life.
Complete System - Feeding, Ventilation,
Ifo Your Authorized Master Distributor
ORTH EAST AGRI
SYSTEMS, INC.
FLYWAY BUSINESS PARK Istok hours:!
139 A West Airport Rd. rS+Jo
Lititz, PA 17343 ULMWia* |
(717) 569-2702 L |
Capital Replacement
and Term Debt
Repayment Margin
This is the last of die Farm
Financial Standards Task Force’s
financial measures. It is used to
make sure that the business gen
erates enough cash to replace non
real-estate capital items (machin
ery, etc.) as they wear out. Odier
wise it will eventually grind to a
halt.
To maintain a line of equipment
with a 10-year turnover, every year
the business should expect that 20
percent of the current market value
should be in purchases made in
that year. Some items will last lon
ger and some will turn over
MILK.
IT'S FITNESS
YOU CAN MONK.
JING OF i
Our auger travels at
so birds are limited froi
until it stops; birds will I*
feed from chain feeders,
causing uneven mitritior
t FEED: Our
Jowly revolve*, remixing i
new feed; their* leave* '
feed to get itale.
BILLED-OUT FEED; Our
a grid to prevent bird* from.
and throwing out feed; neither
disk lyetenu prevent feed
COST SAVINGS: Our* u
amounts of energy co«t> since It's easier
to propel and ruiu only half os long os
theirs
LOW MAINTENANCE; With our 5-year
warranty on auger and 20 ga. trough (one
competitor has only 22 ga.) - plus no
corner wheel mechanisms to wear out -
ours saves you maintenance costs
quicker.
Estimate the replacement needs
of your business at somewhere
between 10 percent and 20 percent
of equipment fair market value. If
non real-estate principal payments
exceed this amount, then there is
enough cash-flow scheduled to
cover this level of replacement. If
not, the shortfall needs to be added
as an additional capital require
ment in the cash-flow projection.
The FINPACK long range
budget calculates these cash flow,
capital replacement, and debt
repayment needs very nicely. If
you need help with such computa
tions, contact your equal opportun
ity extension office for farm man
agement assistance.
PROVEN DESIGN: Over
45 million birds are already
on our feeder worldwide.
Also, 11 was proven In 5 years
of on-tkrm testing before
Introduction.
IBR 1-800-673-2580
SEE US AT THE
Northeast Poultry
and Egg Trade Show
figa and Conference
Hff September 25 and 26, 1991
Lancaster Host Resort
• Lancaster, PA
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