Economic monitoring is essential for effective financial planning and decision-making in forest enterprises. It involves the documentation of the productivity of forest operations and their costs and revenues over time, and its most critical aspect is the monitoring of capital-intensive forest activities such as road construction, skidding, transportation, and site preparation. Setting up a system for economic monitoring involves the inventorying of assets and obligations, and their values, and the documentation of cash flows and changes in the value of assets such as machines (e.g. due to depreciation). A well-designed monitoring system captures financial flows in various cost categories – such as salaries, machinery, service providers, materials, fees and taxes – which are summarized annually in a balance sheet. In smaller operations, information collected by the monitoring system might be processed and analysed by hand or using simple computerized spreadsheets, while larger companies may require specialized software.

One way of responding to a lack of adequate finance and to increase profitability is to reduce expenses. Reducing the size of forest operations has the most immediate effect on costs but may also affect revenue. In many cases, therefore, it is more effective to reduce expenses by improving the efficiency of production processes. Such improvements may include choosing technologies and machinery better suited to tasks, capacities and know-how; the recruitment of staff capable of handling the technical and logistical challenges of SFM; and the training of existing staff. Improvements may also include the optimization of production processes, such as by reducing the impact of machinery malfunctions by proper maintenance and the regular replacement of ageing machines. The information generated by economic monitoring can be particularly helpful in determining cost-reduction targets.

Reducing staff salaries can be counterproductive to efforts to improve efficiency because well-paid employees have been shown to work more effectively. A bonus system that rewards the exceptional performance of employees and service providers (and discourages sloppy work and delays) can be beneficial for both employers and workers. 

Liquidity is the ability to convert an investment portfolio (or part thereof) to cash with little or no loss  in value, especially to ensure adequate cash flow. Money in a bank account may be considered liquid because it can be accessed quickly and easily, but “liquefying” capital items such as machinery or infrastructure is likely to be more time-consuming and difficult.

All enterprises require a certain level of liquidity to ensure sufficient cash flow to meet operational and other expenses. But this is often a major challenge for forest enterprises because a relatively large proportion of capital is typically fixed in land, forests and machinery, and receipts from product sales may not occur when operational expenses are at their peak.

Many forest enterprises in the timber industry face two particularly critical periods for liquidity in any given year: at the beginning of the harvesting season, when operations must be paid for but income from timber sales has not yet been earned; and between harvesting seasons, when income may be low but machinery and infrastructure must be maintained and certain field operations conducted. It may be possible to negotiate for the postponing of expenditure (e.g. paying for a service only after its delivery) and for payment in advance for timber sales. Other potential strategies include minimizing or avoiding the fixation of financial resources in capital assets, and the scheduling of preparatory activities such as inventories outside the harvesting season to reduce cost peaks. Companies should also aim to build up cash reserves over time.

Another approach to improving cash flow is to replace a portion of fixed costs (expenses that occur independently of what is produced, such as loan repayments on a machine) with variable costs (expenses directly related to actual production). For example, outsourcing operations to subcontractors might help to reduce the fixed costs associated with owning machinery and maintaining permanent staff as well as to shrink out-of-season overcapacity. Arranging flexible terms of payment with subcontractors, service providers and employees may also assist in ensuring a smooth flow of finances – it might be possible, for example, to establish a production-dependent salary component or to compensate for reduced salaries by paying bonuses at the end of a harvesting season depending on the profit achieved by the enterprise. Another possibility is to use standing timber as collateral; for example, a plantation of teak, which has a known high-value market, could serve as a guarantee for a loan if cash flow needs to be increased. Such a practice could be generalized through public policies.

An important prerequisite for earning adequate revenue is knowledge of the marketplace; this is even more important for SFM regimes that involve the increased harvesting of “lesser-known” timber species, some of which are potentially valuable timber species. Market research, therefore, may be useful for determining whether the best prices are being obtained for existing products and for identifying and assessing markets for new products. While prices for high-in-demand species in export markets may be strong, ensuring the profitability of lesser-known species, as well as of most non-wood forest products, may require considerable research and marketing. Nevertheless, a careful analysis of local, national and export markets may reveal opportunities for additional revenue. For example, the production of value-added products, and timber certification, might open up new opportunities in export markets.

Some countries have public and private schemes in which payments are offered to forest owners and enterprises for the provision of environmental services such as those associated with biodiversity conservation, water protection and carbon sequestration. Forest enterprises should weigh the risks associated with participation in such schemes to ensure that the benefits outweigh the costs.

Finally, enterprises may evaluate whether expanding production or investing in new technologies might increase their profitability, although instituting such options is likely to require substantial managerial capability, special competencies and the hiring of specialist staff. Cooperation with other enterprises, potentially through associations or cooperatives, might help in finding new clients, exploring new markets, and strengthening bargaining power to obtain higher prices.

Financial planning is essential for good investment decisions on, for example, bids for forest concessions; constructing buildings and roads; harvesting mode; silvicultural treatments; the preparation of management plans; and staff training. For most enterprises, the purchase of machinery is by far the single biggest investment decision they will make. Investment decisions should involve a three-step analysis:

1. the calculation of cost–benefit ratios and profitability indices such as net present value and internal rate of return;
2. the assessment of risk by estimating pay-back periods and doing a sensitivity analysis involving “pessimistic” scenarios; and
3. the consideration of all other implications of the investment, such as reliability and social and environmental aspects.

The vast majority of forest enterprises require at least some level of external funding to finance SFM, and the procurement of loans and use of subsidies, therefore, are essential tasks of forest enterprise managers.

Larger investments are commonly financed through bank loans, the conditions of which can vary widely. Many rural and development banks run special credit lines with favourable conditions for forest enterprises engaged in SFM. Moreover, many countries provide tax breaks for forest enterprises that can prove they are carrying out specific measures for environmental conservation. Certification by the Forest Stewardship Council or the Programme for the Endorsement of Forest Certification, or some other form of external assessment, is usually required for enterprises to benefit from such tax breaks or favourable terms of credit.

Enterprises should be clear on the purpose of any loan and realistic in assessing their capacity to make repayments. Interpersonal networking, information available online, and consultations with bank managers or other service providers are all potentially useful sources of information on credit packages. Obtaining the materials and documents required to secure a loan may take considerable time, and incomplete documentation and a poor credit history can delay or even prevent loan approval; moreover, failed applications may reduce the likelihood of future loans.

The emergence and design of diverse funding possibilities is highly dynamic and strongly influenced by the politics of the day. Enterprise managers should be alert to new opportunities and should check regularly for updates on the websites of relevant government agencies, as well as the websites of international non-governmental and intergovernmental organizations with a presence in the country or region. In many countries, specialized brokers facilitate contact between forestholders and managers and lending institutions, which can increase access to larger investments. Some governmental extension services, non-governmental organizations, universities and research organizations provide help in obtaining funding from external sources; forming cooperatives and associations is another way in which small and medium-sized enterprises can increase their access to credit and other funding opportunities. However, for traditional forest communities that lack the documentation, liability security and skills to formally access loans, informal financing schemes grounded on personal relationships may be the main possibility for acquiring additional funds.

The long-term financial attractiveness of forest management is a fundamental prerequisite for the success of SFM. As shown above, functioning forest enterprises face immense challenges in proper financial management, but SFM also offers several potential financial advantages. For example, the effort made by an enterprise to achieve SFM encourages innovation and structural improvements that enhance its professionalism and the quality of its operations at all levels, including management. Preparatory activities such as inventories and planning have the potential to reduce production costs, particularly through the more effective use of cost-intensive machinery and the minimization of timber losses. SFM facilitates access to often-subsidized financing opportunities in the form of credit, loans and grants, as well as to tax breaks. SFM-certified enterprises may obtain preferential access to stable markets and gain reputations for responsible behaviour. Ultimately, SFM helps ensure the long-term economic use of forests and continued access to the resource and markets, benefiting both the forest enterprise and the community at large. For enterprises to make best use of the advantages offered by SFM, attention to high-quality financial management is essential.