Best if printed in landscape.

Capital

This course will be minimal time on managing capital as an economic resource because this important topic is addressed in considerable detail in other courses. Only several topics will be mentioned in this course relative to capital.

Capital encompasses tools, machinery, equipment, and other facilities used to produce goods or services.

The economic return to capital is interest.

Topics:

• cash v. non-cash capital (e.g. equipment)
• equity capital v. debt capital (leverage)
• cash flow -- amount and timing of cash inflows and outflows; strategies for managing cash flow
• taxes and subsidies impact on capital
• owner contributions and draw impact on capital

Text:

Capital (equity)

Kay Chapter 14 -- Forms of farm business organizations (again)

a way to "pool" equity

 

Interpreting financial statements (again)

 

Non-cost demands on capital

• Owner's draw
• Taxes (sales, property, income, gift, estate)

Federal income tax (Kay 16)

income, minus expenses, compute tax, subtract credits

Introduction to federal gift and estate taxes

value of assets, minus debts, minus deductions, compute tax, subtract credits

impact of lease on qualifying for 26 U.S.C. §2032A farmland valuation (2032A is an application of capitalizing)

property tax -- valuing ND farmland for property tax is an application of enterprise analysis and capitalizing

Capital sources not reliant on production

• Owner's contributions
• Government subsidies (federal government farm program)

impact of business organization on farm program eligibility

Managing cash flow

• Loans and debt payments -- altering the time when capital is borrowed or principal is paid as a way to manage the business' cash flow.
• Sales and purchases -- altering the time of sales and purchases as a way to manage the business' cash flow.
• Lease v. purchase, e.g., equipment
  • There is a "profit" component to this decision, not just a cash flow consideration.  The question of whether to lease or purchase raises an issue similar to the question of purchasing land -- does the desire to earn a profit outweigh, balance, or is outweighed by the cash flow considerations?  Restated, what is the criterion for deciding whether to lease or purchase?  Is it "which alternative will generate the most profit," or is it "which alternative will have the least adverse impact on cash flow, especially the immediate cash flow," or is it some combination of the two criteria?
• Using/preparing a cash flow budget

Managing leverage

• Capital (debt) -- addressed in other courses?

Last Updated August 15, 2010

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

E-Mail:sswandal@ndsuext.nodak.edu
Published by Agricusiness and Applied Economics
Morrill Room 217
North Dakota State University, Fargo, ND 58105-5636
Phone: (701) 231-7441