Managing Capital Needs

Transcription

1 Managing Capital Needs

2 Warm-Up Activity Write a brief description of your enterprise. Include the factors you believe will make it feasible. Feel free to refer to your business plan. List a few things you will need that you do not already have.

3 Today s Questions: How do I use my budget to Determine return on investment? Decide on the size and types of equipment I need?

4 Evaluating New Enterprises Production Feasibility Market Feasibility Financial Feasibility

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7 Chapter 3: Managing Capital Needs Identify factors to consider when evaluating production feasibility Understand the importance of location in identifying markets Learn what criteria are important when selecting enterprises to meet income goals

8 Managing Capital Needs Estimating the cost of capital assets Capital Assets have useful life of more than 1 year Estimating the annual cash returns from the project Estimating the sales value of assets remaining at end of project

9 Enterprise budget: An estimate of the revenues and costs for the production of a certain product Revenue: The cash income received from an enterprise. Variable/ operating costs-costs that are directly tied to the operation of a farm enterprise. Feed, seed, fertilizer, animal health costs, hired labor and fuel are common farm operating costs. Capital/fixed/ overhead costs- Equipment, facilities and other purchases that will be used longer than one season for farm production.

10 Managing Capital Needs Capital budgeting: the process used to evaluate the economic viability of a project involving the use of capital assets Capital Assets: Equipment, facilities that will be sued more than one year

11 Case Study Smith Farm Always wanted to raise cattle on 45 acres farm, Has 20 acres of pasture and hay What are start up cost for cattle? Pasture capacity 5-10 cows Cost of Cows $2,000 to $2,800 each, $10,000 to $28,000 Fence repair 10 acres cost not know Equipment: hay transport truck, wagon, feeder, corral

12 Case Study Smith Farm Cow/calf start up costs at least $12,000 to $30,000 plus more for fencing and equipment $58 returns over variable costs using NCSU budget This does not include any equipment cost

13 Managing Capital Needs Smiths Case Study $58 returns above production costs Take 34 years to pay off just cow investment Land will only support 10 cows

14 Cow Budget

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16 Variable Cost Variable Costs Total Per Cow Pasture 103 5, Hay 30 6, Bull Replacement Heifers 1,500 6, Electricity Repairs Fencing 1% of $23, Meds Equipment maintenance Equipment fuel & repair 1% Total Variable Cost $20,670 $826

17 Depreciation Capital cost costs that will last more than one year Depreciation cost result from wear, obsolescence and age of machinery Age and hours of accumulated use most important factor in determining remaining value remaining value of a machine Useful life Vs. tax life

18 Fix Cost Fix Costs Years Total Per Cow Pasture Pasture Equipment 1, Water Infrast. 5, Fencing 23, , Tractor 12, * 12 Truck 15, Equipment 12, Corral 10, Total Fix Cost $3,794 $151

19 1 Minute Brainstorm Work with a partner to brainstorm a list of capital items you think you would need to start a chicken business. In other words, what capital assets would you need to buy? Share list with whole group Compare the next slide

20 Capital Expense Chicken 40 Hens 200 Hens Brooders $32 $150 Housing $165 $3,500 Birds $135 $550 Feeders $46 $150 Waterers $30 $200 Nesting Box $50 $200 Egg Collection $18 $63 Heat Source $150 $350 Total $626 $5,163

21 Pay Back Cow-Calf 10 cows Stockers 40 calves Fence 2,565 2,565 Handling Equipment 5,000 5,000 Total Capital Cost /Annual Returns above Costs One time pasture and waterer 1,000 1,000 Breeding animals 20,000 Total Start up 28,565 8,565 Annual returns per animal 200/cow 75/calf Annual return above prod. costs 2,000 3,000 Yrs Payback to all costs 14.3 yrs 2.9 yrs Yrs Payback to Equipment Costs 4.3 yrs 2.9 yrs

22 Capital Cost Fence example

23 Pasture expenses Well, waterlines, tanks Electric High tensile Non electric Woven wire Barbed wire Board

24 Perimter= 14,500 ft Cross = 4,000ft 28A 700 Total Acres= 116 Waterline- 5000ft 5 tanks- $1500 ea 1 well- $ A A A 21A 1800

25 Capital Costs Fencing 14,500 Ft Fence 4,000 Cross FT Fence Water lines 5,000 ft Tanks 4 strand Barbed wire $2.62/ft 4 high tensile $2.40/ft 3 strand high Tensile interior Fence $2.25 Polywire Temp 0.10 /lb Water tanks $1,300, PAD $ PVC waterline $2.07 Well pump $2,000 Well cover $350

26 Total Capital Costs Well $2,300 Water lines $10,350 Exterior Fence $34,800 Interior $9,000 Tanks $10,500 Total = $ 66,950

27 Straight Line Depreciation Straight line depreciation relies on the concept of useful life, the number of years a piece of equipment is expected to perform its function. This time period is usually set at 10 to 20 years for farm equipment. (Purchase price Salvage Value) / Years of Useful Life For example: a farm purchases a small used tractor for $20,000.The tractor s useful life is estimated at 15 years, and its salvage value at the end of that time will be $5,000. What is the annual fixed cost of that tractor? ($20,000 Purchase Price - $5,000 Salvage Value) /15 years = $1,000 annual fixed cost

28 Putting a value on equipment Go window shopping Ebay & Craigslist Websites- Machinery Pete, Equipment Dealer, Fastline Classifieds- Fastline Auctions- go and watch

29 Mushroom Start Up Cost

30 Mushroom Start Up

31 Enterprise Budgets Capital cost costs that will last more than one year Ex: building, irrigation, machinery, site preparation Need to estimate the useful life of each item, not necessary tax life. Depreciation

32 Start up Mushroom ESTABLISHMENT COSTS UNIT Cost Useful Life Annual Cost (2) 5" X 48" green oak logs log $1,500 3 $ Mushroom spawn gal $400 1 $ Polyfoam plugs box $36 3 $12.00 High speed drill drill $250 5 $50.00 Drill bits bit $60 5 $12.00 Water tank tank $100 5 $20.00 Used refrigerators unit $200 5 $40.00 Misc. (sprinklers/hose) $100 5 $20.00 Labor-drill, plant, cut plugs, plug, rack hr $420 5 $ Labor-inspect & water hr $90 5 $18.00 Total establishment costs $1,156.00

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37 Tractor and Equipment Decisions

38 It paid for itself in one year I m not so sure.. Farmers who have already made the purchase of a piece of equipment are vested in it, and its success. Do the Pencil Test

39 Cost/Benefit Analysis Current way of doing it Wash, sort, and bag 4000# beets using tub (160 25# bags) 40 hours at $15/hour=$600 With new tool Wash, sort and bag with $2,200 new barrel washer 20 hours at $15/hour=$300. Payback in 7 seasons If 12,000# of beets (480 bags) 120 hours at $15= $1800 If 12,000# of beets (480 bags) 60 hours at $15= $900 Payback in 2.5 seasons

40 Tractor Important features Three point hitch Power take off Wide front end for vegetable farm Low creeper gear Four wheel drive Live hydraulic Safety features Cab?

41 Tractor Purchasing a used tractor Hours of use Useful life around 12,000 hours Available part and service Three ways to buy tractor Auctions Dealerships Classified ads Fastline Tractorhouse Market Farm Implement

42 Used or Almost New Tractor Maintenance & Repair Cost HP Hours $7, HP 34 hours $38,900 Down time or missed planting, cultivating time

43 Horse Power Requirements

44 Fertilization 2 wheel drive bucket tractor loading compost

45 3 PTH Cone Spreader for fertilizer

46 Seed bed preparation 3 PTH Offset Disks

47 S-tine harrows

48 3 PTH rototiller with markers

49 Seeding 3 PTH three row seeder

50 Earthway Precision seeders bolted together Tractor wheel tracks matches pick up truck

51 3 PTH plastic mulch layer

52 3 PTH two row Mechanical transplanter

53 Cultivation 3 PTH Kovar tine weeder, blind cultivation

54 1956 Farmall Cub, offset seat/engine with baskets

55 Farmall Cub with belly mounted sweeps

56 Tools for 1-3 acres Organic Farmer Business Handbook Bare minimum: Shovel, rake, oscillating hoe wheel barrow, (wheel hoe), hoses, hand sprayer Earthway seeder Pick up truck Troybuilt rototiller (small greenhouse) Digital platform scale (20 lb) Scaling up: hp 2WD tractor 3 PTH rototiller 3 PTH mini chisels 3 PTH cultivators Walk in cooler Wash and pack station

57 Grower to Grower

58 Tools for 3-9+ acres Shop tools, chainsaw, mowers, trimmers (welder) handtrucks, box stapler, labels HP tractor: 2WD, or 4WD with loader 3 PTH rototiller Disks 5 8 wide 3 PTH Cultivator Better push seeder 3 PTH Mini chisel Flame weeder (for organic) Barrel washer/brush washer Walk in cooler 200 lb plus platform scale Wash station (packhouse) Bush Hog mower Irrigation system Manure spreader Spinner spreader Portable electric fencing Cultivating tractor (Allis G, Farmall Cub or A, IH 140, Kubota L245H) Basket weeder for above, shovels Tine weeder Bed lifter Bedformer 2 nd tractor 40-60HP Chain harrow, S tine harrow Multiple greenhouses 3PTH transplanter 3 PTH sprayer

59 Grower to Grower

60 Grower to Grower 5 acre Farm

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62 Homework for Session 4 List all capital items you will need to start your farm Buildings Equipment Fencing Irrigation Animals Tools In Ag Plan Facilities Capital request Management Team Personnel Plan

63 Evaluation The link is in your . Please complete before leaving today.