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There are several types of financial accounts each of which is essential to a good bookkeeping system. An inventory of assets and liabilities should be prepared periodically, usually at the end of the year. Comparison of present with previous inventories can indicate gains or losses in the net worth of the enterprise. Records of amount invested in capital assets, such as land, buildings, improvements, and machinery, are necessary to calculate depreciation and to provide a measure of value of the enterprise due to cost and interest on this investment. Production expenses are those expenses which can be attributed directly to production of a marketable product, such as expenses of timber stand improvement. Fixed expenses are those expenses, such as property taxes, which must be paid regardless of production. Also essential to complete records is a record of all income from sales. Analysis of these records will indicate whether the business is making a profit.
Production records for a timber enterprise must include records of all management activities and volumes of products produced. Management activity records would include when, what was done, where done, and results for any activity carried out. Volume records would include what was produced, how much, where it was produced, and sale price. These records are useful in planning future cash flow and in preparing a work plan.
Loans - Most landowners, at one time or another, find that they need credit for capital expense, such as purchasing land or, in some cases, to cover operating costs. Effective use of credit involves understanding how money works. (See Credit Worksheet and Appendix, "Annual Payments on Debt"). The value of a piece of property less any amount owed on it is the owner's equity in the property. Lending agencies set a limit they will loan the landowner using a piece of property as collateral based on his equity in the property. For real estate, this credit limit is often 50% to 75% of equity. In the case of a person purchasing land, this credit limit determines the amount of the down payment he will be required to make.
The annual returns expected from an investment must be greater than the interest paid on the investment and greater than can be obtained from any alternative investment before the investment is worthwhile. Obviously, the lower the interest rate which can be obtained, the higher the profits.
Not only is sufficient equity necessary for a loan, but repayment capacity must be calculated to assure that loan payments can be met as they are due. Repayment capacity is reflected in a cash flow plan. The cash flow plan is also helpful in budgeting and forecasting future financial position.
Sources of credit include local banks, Production Credit Associations, Federal Land Bank, and FmHA. Interest rates, equity requirements, and other regulations vary between lending agencies and should be compared carefully.
Taxes - The timberland owner should become familiar with local property tax rates and assessment practices. Tax rate multiplied by assessment equals the amount of the annual tax. Also important is understanding of Federal income tax terms such as basis, depletion, capital gains, deduction, investment credit, capitalization, depreciation, etc. Study of the tax publication listed in the bibliography and the Appendix, "Taxes Example" will be helpful.
Land Use Conversion - The landowner is sometimes faced with the problem of converting forestland to another use or other land to forest. After careful consideration, such conversions are often not as attractive as they first appear. Factors to consider include suitability of the land for the alternative use, cost of conversion, loss of present benefits, and value of the alternative use. All this should be weighed against the cost of purchase of a site already suitable for the alternate use.
Forest Labor - When forest work is to be done, the landowner may be affected by workmen's compensation, minumum wage, social security, tax withholding laws, and safety laws. He should, therefore, become familiar with these regulations. In all cases, he should carry liability insurance.
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