Agricultural companies currently face various challenges, and must be clear about the financial procedures to be carried out to promote a profitable business that generates profits.
Zamorano developed the “Finance for Agriculture” seminar in order to share knowledge of a modern vision of decision-making in long-term investments. The presentation was conducted by Rommel Reconco, professor in the ZAMORANO Agribusiness Management Department, who offered financial alternatives in making long-term investments, and follow-up strategies in managing the daily financial activities of an agricultural company
In his presentation, Mr. Reconco indicated that some characteristics of food chain businesses correspond to the variability observed in crop yields. This variability is caused by two factors: the climatic conditions associated with changes in the technological levels of production, and the price of the products. Likewise, he stated that agribusiness has certain characteristics that must be considered: seasonality, cyclicality and perishability, among other issues.
He noted that finance in agricultural companies deals with how financing sources, capital structuring and investment decisions are managed. The main objective of finance is to maximize the value of the company and consequently maximize the profits of investors.
As for long-term investments, he specified that consideration must be given to which assets to acquire in order to generate profits in the agricultural projects to be undertaken. “An asset is the tangible or intangible good that a company has. The term ‘capital budget’ is used to describe the process relating to the realization and administration of these expenses aimed at acquiring long-term assets – known as fixed assets – within a company, which generate profits for the company.”
Mr. Reconco maintained that the investor must be clear about the capital budget, that is, the planning or management of long-term projects, which assesses the magnitude, time and risk of cash flows. Here the decision to invest aims to obtain assets that are worth more than what they cost.
“The capital budget fundamentally analyzes the investments whose effects are manifested in several annual periods. This has to do with the introduction of new products, the establishment of new distribution systems, the modernization of a plant, the penetration of new markets, the construction of facilities for warehouses, the renewal of the transport fleet, and any acquisition of physical assets, even to replace existing equipment”, added Reconco.
On the issue of financing long-term investments, he explained that entrepreneurs can be financed by creditors or investors, so it is necessary to determine the capital structure. This structure consists of the combination of long-term debt and equity, which affects both the risk and the value of the company. Here one decides how to finance the assets of the company.
To manage daily financial activities, he indicated that short-term money is required to be able to operate and meet the obligations. “All of the short-term money that the company requires is known as working capital; this is the difference between current assets and current liabilities. The issue of working capital is extremely important for all companies, especially those in agriculture. The capital budget analysis that is carried out through cash flow has three moments: the previous moment, the operational moment and the final moment”, he commented.
Finally, Mr. Reconco advised that the three main financial indicators should be taken into account: payback period, net present value and internal rate of return. “The Monte Carlo Model is a statistical tool that allows modeling cash flow with results according to the historical behavior of the probability of occurrence data,” he added.
You can access the webinar at the following link: https://youtu.be/oGF5YzLJieI