Developing a farm/ranch business plan

Debt Repayment

U.S. National Debt Clock

Debt

• Debt is that which is owed; usually referencing assets owed. In the case of assets, debt is a means of using future purchasing power in the present before income has been earned.

• A debt is created when a creditor agrees to loan a sum of assets to a debtor. Debt is usually granted with expected repayment; in most cases, plus interest.

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Management of Debt

• Crucial for maintaining financial liquidity and avoiding undue risk.

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Borrowing

• For most farmers, borrowing is essential and provides a major source of funds for operating the business.

• Can work to your advantage at times

• Should be avoided at other times

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Financial Leverage

• Expressed as a ratio of debt to net worth.– Borrowing (Increasing leverage) can be effective

during periods when:• Earnings are relatively good• Interest rates are low• Rate of inflation is high

– Under opposite conditions, it’s best to wait for a more opportune time to buy land, expand an enterprise, or make other capital expenditures

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Leverage

• The use of borrowed capital to increase the potential return of an investment.

• The amount of debt used to finance a businesses assets. A business with significantly more debt than equity is considered to be highly leveraged.

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The End