MANAGEMENT SKILLS NEEDED FOR FARMING Victor or O. Oko koruwa - - PowerPoint PPT Presentation

UNDERSTANDING FINANCIAL MANAGEMENT SKILLS NEEDED FOR FARMING

Victor

• r O. Oko

koruwa ruwa (Ph Ph.D) Pr Prof

• fes

essor sor of

• f Agricul

icultural tural Ec Econ

• nom
• mics

ics Univ ivers ersit ity y of

• f Ibadan

Ibadan

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Outline of presentation ❖Preambles ❖Financial Management ❖Farm Record and Accounting ❖Financial Management and Agricultural Enterprises ❖Tips for Preparing Feasibility Report ❖Conclusion

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Preambles

Although resources are scares some are available to the farmer to use in order to maximize his income and other welfare objectives. However, farmer has to make constant decisions for several reasons :

• The environment where he operates is dynamic ( input and
• utput price change)
• Not limited to a choice; as there are several alternative

ways of combining resources and must identify the one that maximizes his income.

• The farm manager/financial manager needs to raise funds

at acceptable interest rates which depends on a good maintenance of the financial records and accounts.

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Preambles Cont’d

As a business person, you engage in various activities whereby money flows through your business. Essentially, you have money coming into your business and money going out of your business. These money flows are called transactions. Money will flow into your business from four main sources, and it will flow out of your business for four main reasons – each is essentially the opposite of the

• ther.

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Financial Management Cont’d

Financial management refers to: Wise management of a business/ its finances or funds ✓A prudent management of farm capital resources is a major determinant of the farm’s success ✓Good financial management is required for the following reasons:

• Capital is scarce.
• It is crucial in profit maximization a

major goal of privately owned farms.

• Aids access to investment capital

from financial houses ✓It is a decision making process which involves: Objectives, problem, information, analysis, decision, implementation, responsibility, evaluation

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Financial Management Cont’d

In order to protect all parties, transactions are supported by documents recording their details, hence farm management involves: ➢Farm Records and Accounting ➢Agric Finance and Credit ➢Farm Project Management

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Farm Record and Accounting

Farm record is the sine qua non of effective farm management and the backbone of farm enterprises aiming at profit maximization. Most important reason for good records keeping is that it’s a legal requirement. Others include: Monitor the health of your business- to evaluate the performance of your farm or farm enterprise within a given period of time and be able to make sound business decisions e.g, by keeping track of debtors and creditors To aid in making farm management decisions e.g control of labourers , machineries

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Farm Record and Accounting

For credit purposes -demonstrate your financial position to banks and other lenders, and also to prospective buyers of your business For taxation and insurance purposes- to manage your cash flow so you can pay your tax when it falls due For planning purposes- These include farm maps and grazing, irrigation, fertilizer use, crop yield, areas and management operations records

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Farm Records

Types of Farm Records Type and number of farm records kept by the farmer depends on what he/she considers to be relevant to the business. ✓Inventory records ✓Production records ✓Expenditure and income records ✓Special or supplementary records

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Farm Records Cont’d

Inventory Records

The complete count and evaluation of all assets and liabilities on the farm at a specified date. (Assets/ Liabilities should be defined) Shows the net worth and stock of the farm at a point in time. Records the expenses due to depreciation. An inventory is taking by first the physical count of assets (fixed and working) and liabilities and listing them; and secondly making a valuation of the listed items.

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Farm Records Cont’d

Production Records

• Physical records of quantities of inputs used in the

production process and the outputs obtained from the business (crops and livestock husbandry must be recorded)

• Labor input records for each enterprise in either

mandays or man hours fall into this category.

• Machinery and other service records

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Farm Records Cont’d

Expenditure and Income Records

• They are derived from production records;

designated in monetary terms.

• They contain basically purchases and expenses and

sales. Supplementary or Special Records

• They include maps (soil, farm) and legal document

soft the farm.

• Farm layout and soil map are necessary for

consistent planning and economical use of the land.

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Farm Records Cont’d

Measures derivable from farm records used assessing the farm business include-Aggregate; Ratio measures and Efficiency measures ➢ Aggregate measures include: ✓Networth statement or the balance sheet ✓Income statement or profit and loss statement ➢ Ratio measures used to compare farms of all sizes are preferred because it is unitless and derived from the Networth statement:

✓ Net Capital Ratio (NCR) -ratio of total assets to total liabilities measures the farm’s degree of financial safety

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This determine the

• verall

performance

• f a farm

within a specified period- total value of asset less total value of liabilities

NETWORTH STATEMENT OF A MIXED FARM ASSETS LIABILITIES Item Value Current Assets (Naira) Cash in Hand 500 Stocks for Sale 1,500 Accounts Receivable 1,200 Working Assets Feed in Stock 500 Supplies 200 Harvested Crops 9,000 Fixed Assets Land (including crops on land) 3,000 Buildings 10,000 Machinery and Equipment 15,000 Dairy Cows and breeding stock 15,000 Total Assets 55,900 Item Value Current Liabilities (Naira) Debts due for payment 500 Medium Term Liabilities Debts due for payment in a 12,000 to two Long Term Liabilities Mortgages 5,000 Debts due for payment in a long term Total Liabilities 37,500 Networth 18,400 Net Capital Ratio (NCR) = 55,900 37,500 = 1.49 Working Capital Ratio (WCR) = 12,900 12,5𝑃𝑃 = 1.03 Current Capital Ratio (CCR) = 3,200 500 = 6.40

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INCOME STATEMENT OF A MIXED FARM EXPENDITURE (DEBITS) INCOME (CREDITS) Item Value Operating Expenses (Naira) Machinery and equipment 400 Upkeep Labour hired 2,200 Fertilizers and other chemicals 650 bought Seeds and planting materials 1,000 Bought Livestock feed bought 1,300 Medicines bought 200 Supplies bought 50 Total Operating Expenses 5,800 Fixed Expenses Taxes paid - Interest payments 500 Insurance payments - Management expenses - Total Fixed Expenses 500 Total Cash Expenses 6,300 Item Value Crop Sales (Naira) Rice 5,000 Maize 3,000 Yam 2,000 Beans 2,500 Other crops 1,200 Total crop sales 13,700 Livestock Sales Cattle - Milk 1,500 Pigs - Poultry (chicken) 1,600 Eggs 2,200 Other livestock sales - Total livestock sales 5,300 Other Receipts Receipts from hired-out machinery 500 Gross Cash Income 19,500

A snapshot of the production cycle’s performance and shows areas where expenditure is high and which enterprise is bringing in high revenue

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Farm Records Cont’d

✓Working Capital Ratio (WCR)- ratio of the sum of working capital and current assets to the sum of medium term and current term liabilities and measures the degree of financial safety of the farm

• ver an immediate period of time.

✓Current Capital Ratio (CCR) - ratio of the sum of current assets to sum of current liabilities and measures the degree of immediate solvency of the farm, that is, the ability of the farm to meet current

• bligation.

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Farm Records Cont’d

Other measures computed farm records ✓Yield per hectare ✓Crop yield indices ✓Gross margin ✓Fertilizer input per hectare ✓Eggs per hen ✓Number of pigs weaned per litter etc ✓Gross Margin

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Farm Records Cont’d

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Criteria for record keeping ➢They must be useful ➢Must be kept in such a form that they can be easily converted into information ➢Keeping systems must be simple ➢Duplication must be avoided as much as possible ➢Must lead to actions being taken

Financial Management in Agricultural Enterprises

Financial management refers to the management of the farm’s capital resources capital resources are grouped as: ✓ Fixed Capital/Assets ✓ Working Capital/Assets ✓ Current Capital/Assets Farm Networth Statement, Income Statement as well as the Farm Cash flow are the basis for farm Financial Management. Four categories

• f

ratios can be computed from these which will aid farm financial

• decisions. They include: Liquidity ratio, leverage ratio,

acidity ratio and profitability ratio

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Financial Management in Agricultural Enterprises

Liquidity Ratios-measure the capacity of the farm to meet short term obligations The Current Ratio (discussed earlier) Current Assets Current Liabilities The Quick Ratio also called the acid test is given by Current Assets – Inventories Current Liabilities

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Financial Management in Agricultural Enterprises Cont’d

Leverage Ratios: -measure the ability of the farm business to honour short and long term obligations. A highly leveraged farm is not in any good position to pay off debts; a a business should aim at low leverage ratios. The ratios include:  Total Debt/Total Assets Ratio = 1 OR Total Debt(Liabilities) NCR Total Assets  Debt/Equity (Net worth Ratio) = Total Debt (liabilities) Equity (Net worth) measures ability to honour long term obligations  Times Interest Earned Ratio (TIER) measures the ability to honour its interest and tax payments given by: EBIT (Earnings Before Interest and Taxes ) Interest and Taxes to be paid If the ratio is unity -the farm has just earned enough to pay interest and taxes.

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Financial Management in Agricultural Enterprises Cont’d

Activity Ratios-measure the intensity of use of assets on the farm; they include the following: Inventory Turnover (I.T) measures rate at which inventories are sold given by Total Sales Average of Inventories Fixed Asset Turnover (FAT) measures the intensity of fixed assets used Total Sales Fixed Assets The higher the ratio the more fixed assets are being used up in the production process. Total Assets Turnover (TAT) measures the rate at which total assets are used up in the production and sale of goods and services and given by: Total Sales Total Assets

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Financial Management in Agricultural Enterprises Cont’d

Average Collection Period (ACP) measures the time lag between sales and cash received from buyers given by: Accounts Receivable Average Sales Per day It is important in taking decisions because it partly determines the ability to meet monetary obligations. An increasing ACP

• ver times indicates the need

to tighten credit sales. Profitability Ratios-gives an indication of whether the business is getting more profitable or less profitable over time and the factors responsible for the increase or decrease Net Operating Margin (on Sales) (NOM) an indicator of ‘good’ or ‘bad’ business given by: Operating Income Sales

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Financial Management in Agricultural Enterprises Cont’d

Operating income refers to sales less the cost of goods sold and

• perating (marketing) expenses. It is also called ‘profit’. An

increasing NOM show indicates a good business and vice versa Profit Margin on Sales (PMS) indicates the relationship between profit and sales given by: Net Profit Sales Net profit refers to operating income less fixed expenses such as insurance charges, depreciation, interest expenses and taxes.

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Preparing Feasibility Reports

✓This is necessary when requesting a loan from a bank. ✓It involves being able to evaluate a project and making financial plans for it. ✓The amount of equity capital, loan capital and income as well as its sources should be stated in detail. ✓The loan repayment schedule the use to which the loan will be put and the overall csh flow for the investment period should be included

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Conclusion

The success of any farm business depends on its financial strength and for this to happen there is a need for proper record keeping of every activity taken placing within the business and the available resources used for carrying out these activity. Record keeping is a veritable way of ensuring a business is sound and would attract ore investment for expansion.

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