This post includes themes from the newly updated 7^th Edition of Forest Finance Simplified and 2^nd Edition of Aunt Fanny Learns Forestry.

Forest Finance Simplified, a book I originally wrote as a reference for myself, helps readers strengthen their understanding of and fluency with the tools used to manage forest resources as investments. Over time, I continued to revise the book based on common questions from students participating in Forisk’s Applied Forest Finance short courses.

Core Forest Finance Principles

Every forest owner interested in the financial performance of their asset should understand the core ideas related to the time value of money and opportunity costs. The time value of money reminds us that we prefer dollars today rather than dollars tomorrow (though I’m not sure that one requires much reminding). The application of this concept encourages us to invest in forest management activities that, for example, shorten forest rotations and accelerate the generation of cash from our trees.

Opportunity cost reminds us to always compare the placing of capital into forests versus our next best investment alternative. When gauging the value of a timberland investment against other opportunities, ignore sunk costs and evaluate the forest based on its ability to generate income and returns moving forward. The only time we have complete control over our portfolio is today.

For a range of objectives, finance represents a trade-off between today and tomorrow. Investing in something now – a factory, research, or timberland – means giving something today to gain in the future. The tools of finance help us assess whether each forest investment opportunity meets our specific objectives.

Common Errors

At times, investors decide to sell their timberland to lock in a profit or to reduce their forest management expenses to secure quick savings without doing the math. While realizing profits or cost savings are generally enjoyable and pleasing to a cash balance, they sometimes sacrifice longer term goals or financial performance.

When someone talks about selling their timberlands, one question I often ask is, “what do you plan to do with the proceeds?” The tax implications and opportunity costs are too high for selling without a plan. A healthy timberland profit tagged with a big tax bill can become a pittance and hangover of regrets. Tax mitigation strategies and like-kind exchanges exist for reasons.

In addition, any across-the-board reductions in silviculture treatments deserve a careful review and consideration, as the impacts on forest productivity and returns will vary across the land and forest rotation. It’s one thing to reduce from four fertilizer treatments to three, and another to go from high quality seedlings to low. Each can save money in the short term, but they may also reduce future cash flows and returns. Do the math before cutting forest management.

Understanding Finance Improves Forest Investment Returns

Basic financial tools and frameworks help organize our thinking, especially when making changes. Years ago, a timberland-owning client optimized their forests for growing grade (sawtimber) volume rather than value (cash flow). They had focused on larger trees and volume, and one day decided to test the numbers on a financial basis. We helped them go through the exercise of comparing the value from the existing forest rotation versus alternative shorter rotations with prevailing timber prices. Based on the analysis, the owners immediately began reducing their forest rotations across the portfolio by six to 10 years. The changes increase cash flows, returns, and values.

With finance, you work with what the local markets and your soils give you to optimize the forest management plan.

Conclusion

When evaluating timberland holdings, revisit key questions, starting with your financial objectives. Ask, “Do my reasons (my investment thesis) for owning the asset still apply?” If the investment helpfully diversifies your portfolio and generates cash as needed relative to other investment opportunities, then your timberlands are doing what they are supposed to do.

Also, consider the question, “How do I evaluate short-term opportunities to enhance the performance of my forest asset?”Marginal analysis supports forest management and intermediate harvest decisions. It answers, “when to harvest?” and “when does forest management pay?” and “should I accept this ‘woods run’ or ‘camp run’ offer to bring all logs to the mill?” Incremental differences in costs and benefits “on the margin” clarify decision making for new treatments or harvest decisions.

Click here for a brief video on “Why Read Forest Finance Simplified?”