The increasing capital intensity

The increasing capital intensity with nearly constant capital availability in the growing agricultural companies, which by the retreat of the state highly volatile markets with their chances and risks, require an improved strategic financial management in the enterprises, in order to secure their existence in the long term.

It is true that most agricultural companies still have an equity ratio of over 85%. However, there is a large difference in the equity ratio between West German family businesses and East German agribusinesses. Even within West German agriculture, the equity ratio of companies willing to grow and stagnating businesses differs. Particularly in companies in which the demand for debt capital increases significantly, there is a need for financial planning instruments with which it is possible to model the sensitivity of various financing alternatives and the planned operational development steps over a longer period of time.

The starting point of a financial planning concept is the limitation of the financing concept. For the time being, this can be settled between the narrow concept of financing, which merely includes the raising of capital for fixed investment and the further concept of financing, which equates financing with capital procurement and the use of capital. In addition to the traditional concept of wealth and capital, one can also distinguish a monetary concept of financing. Instead of a change in capital, the monetary financing concept focuses on the flow of money, which includes the totality of cash inflows and, correspondingly, the cash outflows. Thus, this concept of financing includes both internal and external sources of money and capital, including the capital release effects.

The task of strategic financing of the agricultural enterprise suggests to use river sizes. As a result, financing will be included in the entire monetary performance of the economy, with the aim of making all cash-relevant assets as profitable as possible. Another aspect that speaks in favor of using the monetary financing concept is liquidity, which can be mapped by cash flows. In this way, the essential goal of the strategic planning instrument is satisfied by anticipating possible development opportunities to ensure the long-term viability of the company or to prevent illiquidity in the planning horizon.

problem

Operational estimates in advance of major investments have a long tradition in agricultural management, but their practical application is still incomplete. In the consulting practice, the focus is on the consideration of the static times, starting position and target year. Decisions are then made on the basis of whether the company’s development makes sense, ie. H. profitability is increased and liquidity is assured. However, two omissions in the conventional approach should be noted: on the one hand all models developed so far only insufficiently illustrate the troubled transitional period between the starting point and the target or the period following large investments, and on the other hand only two interest rates apply to the calculation – one for equity, the other for borrowed capital – without taking into account the variety of funding opportunities.

The defect caused by the non-consideration z. If, for example, the start-up phase of an investment arises, companies underestimate the dangers in the organizational reorientation, with the consequence of liquidity problems directly in the start-up phase of the new investment. Due to production problems or market failures. In his simulation studies, SPIELHOFF (2001) shows a clear correlation between the start time of investments in pig farming and balance sheet imbalances in the start-up phase. The practical experience after the bull market on the pigmeat market (in the year after the first BSE crisis) confirms this correlation: investment activity increased considerably due to high prices and led to the collapse of meat prices. In the feedback, this led to significant financial problems of the companies that had made investments at that time. In many cases, the effect was compounded by incorrect financial decisions, such as over-the-counter financing, rather than assuming a bear market early on and switching to medium-term debt financing. This problem could have been avoided by an efficient planning system.

The various alternative courses of action on the financing side are usually completely ignored in profitability calculations. In financing practice, there is no exogenous fixed fixed-rate interest, but depending on the form of credit, term and interest rate commitment, there is a range for this interest, which the farmer can certainly influence as a borrower. With regard to the liquidity of the company, the questions about the optimal amount of credit provision as well as the repayment modalities are moving into the center of attention. Since repayments are cash-effective but do not represent any expense or expense, they are not adequately analyzed in profitability analysis. The popular rule “Repayments at Depreciation” does not provide any information about the liquidity burden of such an approach nor is it able to elucidate the effects of a shorter repayment period than the depreciation period.

objective

Although both scientific simulation studies and practical findings repeatedly reveal risks that jeopardize business operations, these are only insufficiently taken into account in existing planning systems. Due to the lack of suitable planning systems, this work sets out to develop a model that, given the profitability of an investment in principle, enables efficient strategic liquidity planning and maps appropriate adaptation strategies. Due to its special relevance for consulting, the financial planning model should be designed in the form of a consulting application that is based on the following criteria:

1. Transparency in model-related decisions

2. Orientation on human judgment (taking into account the blurring in the demarcation of human decisions)

3. comprehensible communicability of the model results in the consultant – farmer dialogue

On the other hand, with this primary objective, another objective is to derive possible consequences from various funding options and to derive general statements regarding the effect of choosing a particular financing option.