FINANCIAL VIABILITY OF POULTRY PROJECTS IN INDIA
The poultry farming plays an important role in the rural economy of India. During the last two decades, the poultry industry in India has gained a tremendous momentum and has virtually reached a stage of self-sufficiency and specialization. Rapid growth of poultry industry has been encouraging many farmers to adopt poultry farming as the main source of their income. In spite of various developments in modern poultry farming, disease problems remain as a major constraint affecting its successful functioning.
Poultry business is attractive as any other business and is a home-farm enterprise. It plays an important role in converting grain and other products into eggs and poultry meat for the non-traditional benefit of mankind. Agriculture and poultry are interdependent as the cereals form part of feed for poultry and poultry wastages are inputs for agriculture. Poultry production can play a significant role to raise the economic status of the rural masses, improve their level of nutrition and also generate employment opportunities. Poultry farming is relatively easier and quicker and can be adapted to a wide range of climatic conditions and can generally be conveniently carried out with other farm activities like crop production, dairying and sheep rearing. Introduction of some of the world’s best poultry breeds has made a major contribution to the development of the poultry programme in India. The commercial poultry farming has increasingly been taken up during recent years in almost all over the country (IPED, 2018). There are few segments poultry industry, comprising layers, broilers and others. In the egg production layers are kept in cages during their production cycle of 72 weeks. Once their productivity declines, they are sold in the market for consumption. Income from layer farm poultry products includes sale of eggs, cull birds, gunny bags and manure. India is marching ahead towards attaining nutritional security for its people. In this context, poultry eggs, which is highly nutritious and the cheapest source of high quality protein and the poultry meat that is comparatively less expensive than that of red meat (Vengoto and Sharma (2018).
Poultry farming is a significant source of revenue generation in developing countries. It plays a vital role in fulfilling the daily protein requirements of humans through meat and eggs consumption. Poultry farming business is highly profitable if it is properly run under the acceptable methods and follows specific operational principles; but when such principles are ignored by the farm authority, it causes in serious losses. Viability / Financial Viability of poultry business / projects is the ability to generate sufficient income to meet operating payments, debt commitments and, where applicable, to allow growth while maintaining service levels.
Methods of assessing financial viability of projects
1. FINANCIAL PROJECTIONS: a) Profits after Tax at Optimal Year of Production. b) Net cash Accruals from Profitability Estimates at Optimal Year of Production. c) Net Surplus/ Deficit from Cash Flow Estimates at Optimal Year of Production. All the above should be positive. The basic objective of working out the financial projections is to facilitate the detailed financial analysis of the projects. The figures of financial projections in isolation cannot be used as a tool for accepting or rejecting a proposal. Therefore, financial analysis of the projects has to be carried out to ascertain the financial soundness of projects and to comment upon the financial implications.
2. FINANCIAL ANALYSIS: Financial analysis of viability of poultry projects includes a) Ratio analysis b) Break even analysis c) Traditional appraisal methods d) Discounted cash flow techniques a) Ratio analysis: There are various ratios which enable to focus attention on the interrelationship of certain items or a group of items with certain other items or group of items so as to pinpoint the strengths and weaknesses, if any, in the financial position. (i) Debt equity ratio (ii) Debt service coverage ratio (iii) Net profit ratio (iv) Interest coverage ratio (v) Return on capital employed
i) Debt equity ratio: The debt-to-equity (D/E) is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets should be low
Debt equity ratio = Total liabilities Shareholders’ Equity
ii) Debt service coverage ratio: It indicates the capacity of the unit to repay the term loans; is regarded as a very important ratio for development banks providing long term assistance to the projects. In general, it is calculated by, DSCR = Net Operating Income Debt service Where, Net Operating Income = Net Income + Depreciation + Interest Expense + Other Non-cash Items
Debt Service = Principal Repayment + Interest Payments + Lease Payments iii) Net profit ratio: Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.
Net profit ratio = Net profit Revenue (OR) Net profit ratio = Revenue – Cost Revenue (iv) Interest coverage ratio: The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio may be calculated by dividing a company’s earnings before interest and taxes (EBIT) during a given period by the company’s interest payments due within same period.
The method for calculating interest coverage ratio may be represented with the following formula:
Interest coverage ratio = Earnings before interest and taxes Interest expense (v) Return on capital employed: Return on capital employed (ROCE) is a financial ratio that measures a company’s profitability and the efficiency with which it’s capital is employed. ROCE is calculated as: ROCE = Earnings Before Interest and Tax (EBIT) Capital Employed b) Break-even analysis: The Break-even point (BEP) in economics, business and specifically cost accounting is the point at which total cost and total revenue are equal (i.e.) EVEN. There is no net loss or gain and one has “BROKEN EVEN”
A break-even point (BEP) or break-even level represents the sales amount in either unit (quantity) or revenue (sales) terms, that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero. It is only possible for a firm to pass the break-even point if the dollar value of sales is higher than the variable costs per unit. This means that the selling price of good must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable costs). Once they surpass the break-even price, the company can start making a profit. The break-even point is one of the most commonly used concepts of financial analysis and is not only limited to economic use, but can also be used by entrepreneurs, accountants, financial planners, managers and even marketers. Break-even points can be useful to all avenues of a business, as it allows employees to identify required outputs and work towards meeting these. The break-even value is not a generic value and will vary dependent on the individual business. Some businesses may have a higher or lower break-even point, however it is important that each business develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs. Each sale will also make a contribution to the payment of fixed costs as well.
c) Traditional appraisal methods: Two methods viz ; payback period and accounting rate of return has been used to focus on the financial viability of the projects. Payback period which indicates the total period within which the capital investment will be recovered through net cash flows (after tax). Accounting rate of return (ARR) takes into account the financial accounting practices of the unit for working out of the annual profits. As an accept-reject criterion, the ARR is to be compared with a predetermined or a minimum required rate of return or cutoff rate. Cost of capital has been used as a cut – off rate for evaluating the projects.
d) Discounted cash flow techniques:
(i) Net Present Value (NPV): Net Present Value (NPV) is the difference between the present value of cash inflows and cash outflows over a period of time. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. A positive NPV indicates that the projected earnings generated by a project or investment exceeds the anticipates costs. Generally, an investment with a positive NPV will be profitable.
(ii) Internal Rate of Return (IRR): Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPN) of all cash flows from a particular project equal to zero. Project with higher IRR is preferable.
There remain a lot of factors that makes poultry farming business a profitable project. The viable poultry project will create market access, employment opportunities and thereby improve income of farmers.
Compiled & Shared by- Team, LITD (Livestock Institute of Training & Development)
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