The start of the holiday season signals the close of the strategic planning and budgeting cycle for many firms. In the forest products industry, over the next 24 months, prioritized investment projects will move from the white board to the actual allocation of capital and implementation of projects. These include new acquisitions, mill expansions, and silviculture activities on timberlands. This process is a reminder that finance is not an end to itself. Rather, finance provides a means for choosing investments and deciding how to pay for them.
What leads one firm to make a capital investment and another similar firm to reject it? In practice, the evaluation of potential investments may occur “on the margin” in a vacuum prior to reconciliation with a firm’s strategic plans or broader objectives. In finance, good capital investments generate positive net present value (NPV). Ideally, the projects under consideration fall in those lines of business identified in the firm’s strategic plan as those providing the greatest opportunities for long-run success. One firm’s opportunity is another firm’s albatross.
Forest finance, the language of managing forest and timber resources as investments, provides a set of tools for supporting forest investment decisions. Forest finance tools support the “bottom-up” analysis of individual forestry projects while strategic planning leads to a “top-down” process for choosing the wood businesses and timber markets in which to operate. In short, forest finance and strategic planning both support the capital allocation process.
Click here to learn about and register for “Applied Forest Finance” on February 10th in Atlanta, Georgia. The course details necessary skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.
How is an individual forest resource investor or a firm’s team of investment decision makers, I wonder, able to take sound forest investment decisions in an investment climate as toxic as the one which has enveloped us these past many years? Near zero, probably negative real interest rates; a deluge of digital money creation by the lender of last resort washing away all free market price signals, doubtful economic data reports from the countless ministries of economic performance, increasingly insecure financial contract enforcement, and uncertain regulatory caprice make Austrian malinvestments all but certain. The investors, the firms may go bankrupt. The trees, though, will continue to grow, oblivious to the fates of foresters and financiers.