4. RESULTADOS
4.2 RESULTADOS DE ENCUESTAS Y ENTREVISTAS
4.2.1 De los Directivos
404
5.0 SUMMARY
You have learnt that the principle of owner‟s equity hinges upon the fact that the risk in farming tends to increase at an increasing rate, as the owner‟s equity decreases.
Leverage is the ratio of debt to equity which becomes higher on the farms using more and more of non-equity capital. As the leverage gets higher with more borrowed capital, the farmer gets expected returns and the prosperity of the farm business increases. But if the farmer incurs losses, the effect is destructive.
Therefore credit is a double edged knife and hence the requisite amounts only, need to be borrowed by the farmers.
In this unit you have also learnt the set of procedures and formalities required in processing a farm loan application.
You have also learnt the various repayment plans in vogue particularly:
Straight-end payment plan or single repayment plan or lump sum repayment plan;
Partial repayment plan;
Amortised decreasing repayment plan;
Amortised even repayment plan;
Variable repayment plan;
Optional repayment plan; and
Reserve repayment plan.
6.0 TUTOR-MARKED ASSIGNMENT
1. Credit is a double edged knife. Discuss.2. What is amortisation?
3. For a loan of 20,000 naira with 6 years repayment period at 10%
rate of interest complete the amortised even repayment plan
7.0 REFERENCES/FURTHER READING
Nelson, A. G. & Murray, W. G. (1968). Agricultural Finance. USA:
Iowa State University Press.
Olukosi, J. O. & Alamu, J. F. (2013). Introduction to Agricultural Finance: Principles and Applications. Nigeria: Great Glory Publishers.
Reddy, S. S. & Ram, P. R. (2004). Agricultural Finance and Management. New Delhi: Oxford & IBH Publishing Co. PVT.
405
CONTENTS 1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 What is Planning?
3.2 Need for Planning
3.3 Planning Techniques: Budgeting 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Reading
1.0 INTRODUCTION
Every farm financial manager has to assess the performance of his business, in order to act suitably. Various tools of financial analysis, viz., farm planning and budgeting, the balance sheet, income statement, cash flow statement, break-even-analysis etc., are available to him in this regard. These tools in are presented in five segments. This unit treats the introductory part while the others are treated in subsequent units.
2.0 OBJECTIVES
At the end of this unit, you should be able to:
The meaning of planning
Need to planning
Budgeting technique
Advantages of budgets
Difference between partial and complete budgets
3.0 MAIN CONTENT
3.1 What is Planning?
Farm planning and budgeting are the most important tools of farm business analysis. The most profitable alternative enterprises are selected in the planning process by organising the available land, labour and capital resources into proper combinations. Any scheme of action prepared in advance to attain the set objectives is a plan. A farm plan is a scheme for operation and organisation of farm business to get maximum net returns. Planning refers to the process of formulating a plan. In planning, we specify as to how land is to be allotted among
406
alternative profitable enterprises and how limited capital and fixed family labour are most profitably combined in different periods of time to produce desired crop and livestock products.
Economic principles provide the guidelines and rules and simplify the complex decision problems of what to produce, how to produce and how much to produce from crops and livestock enterprises, under the given set of resources. Plans give a systematic and organised procedure by exactly specifying the enterprises and their resource requirements. In fact, a farm manager must formulate sound alternative farm plans and budgets in order to be a successful farm manager. In plans we specify the enterprises along with their resource requirements in physical units but in budgeting we account for their monetary value for judging their profitability.
3.2 Need for Planning
The need for farm plans stems from the desire of the farmer to attain his set goals and objectives. New ideas and information on technology of farms must be gathered and put into plan for execution, if the farmer aims at achieving higher returns from his given resources. Careful examination of the resources and their efficiencies must be ensured along with minimisation in wastages. Judicious use and combination of resources for producing existing and new enterprises, which have potential for furthering income and employment of family labour on a continuous time basis, must be allowed in plans. Sources of procuring the requisite credit along with other essential inputs, marketing, arrangements for sale of output, risk and uncertainties in production and marketing, prevention of unnecessary stresses and strains in the use of resources etc., must be considered in making good plans. A good plan must be useful in seeing the future requirements. It must be flexible to suit the changes in the weather, market and farm environment. It should provide food, cash and fodder requirements in combining the crop and livestock enterprises. There should be provision in plans for crop rotation to maintain and improve soil fertility.
It should satisfy the stated objectives of the farmer and consider inventory of the scarce resources and financial constraints. Technical coefficients along with techniques of organising the scarce resources and enterprises must be given due consideration in formulating the plans.
407
3.3 Planning Techniques: Budgeting
Some techniques are simple, while others are more complex. Budgeting is the most informal method, whereas Linear Programming and non-Linear Programming are the most sophisticated techniques for providing appropriate solutions under certainty, risk and constrained situations.
In budgeting process, we estimate costs, returns and net profit of a farmer or a particular enterprise and, hence, it helps in advance estimation of expenses and income of a farm business. Budgets are usually prepared for a year, considering the revenue and expenditure.
When budgeting is done for a single enterprise or two enterprises then it is called partial budgeting. If budgeting is done for all the enterprises in terms of costs, revenues and net profits for the whole farm, then it is termed as complete budgeting or total budgeting or whole farm budgeting. In this process, the best combination of enterprises is judged based on the productivity of the resources and the ability of the farm operator to maximise the returns. Budgeting has several implications in farm financial management. Farm budgets assist the farmer in exercising economic control over his farm business. They also help the lending institutions in decisions like justifying the sanction of loan or rejection of the same. Credit needs of the farmer in different time periods of the year are vividly shown by the budgets. Budgets also help in fixing the repayment schedules and sanction of loans at appropriate time. Thus, budgets form a basis to determine the quantum of credit to be given to a particular farm.
3.3.1 Advantages of Budgets
(1) Estimation of economic viability of agricultural development projects, (2) judging the repayment capacity of the farmer, (3) reorganising the resources and enterprises for amortising the loans, (4) preparation of cash-flow statements, (5) assessment of credit requirements of the farmers in different seasons of a year, and (6) maximisation of net returns from the farm as a whole.
3.3.2 Partial and complete budgets
The two types of budgets, i.e., partial and complete distinctly differ from each other in the following ways. In partial budgeting we try to introduce minor changes like, use of high yielding variety of seeds, different doses of fertiliser use, etc., and their corresponding costs and returns in terms of added costs and added returns and bring forth the impact of these minor changes on returns of the enterprise. In complete budgeting we contemplate complete transformation in enterprises bringing about desired changes in methods of production, techniques of
408
adoption, etc. By doing so, sometimes new potential enterprises are selected, replacing the traditional ones. In partial budgeting, only a few alternatives with a good range of profit are considered, while in complete budgeting all the possible alternatives without omission are tried, and the best one is selected in terms of profits. Partial budgeting is done for a part of the farm business only, while in complete budgeting entire farm is considered and the best profitable alternatives are chosen.
3.3.3 Enterprise Budgeting
This is a kind of partial budgeting, but, strictly refers to one enterprise in terms of its importance and frequent use in farm planning. It is a pre-requisite for the preparation of partial budgeting, complete budgeting and programming models.
An enterprise budget considers the expected or average requirement of inputs and their corresponding average output, which are called technical coefficients. These technical coefficients are expressed both in physical units and value terms for a unit of particular activity. Such enterprise budgets are prepared for production activities on farms which indicate returns over variable costs per unit of activity. Thus, physical input-output data along with price data on inputs and output are essential for preparing enterprise budgets. Crop enterprise budgets relate to individual crop production activities, while livestock enterprise budgets pertain to milk, eggs, wool, mutton, etc. Several budgets are often formulated for the same enterprise or crop activity, if there is change in technical coefficients for the enterprise.
SELF-ASSESSMENT EXERCISE
i. What do you understand by planning?
ii. Why should a farmer plan?
4.0 CONCLUSION
You have learnt about the meaning of planning, need to planning, budgeting technique, advantages of budgets, difference between partial and complete budgets.
409
5.0 SUMMARY
Farm planning and budgeting are the most important tools of farm business analysis.
Planning refers to the process of formulating a plan.
In planning, we specify as to how land is to be allotted among alternative profitable enterprises and how limited capital and fixed family labour are most profitably combined in different periods of time to produce desired crop and livestock products.
Planning helps the farmer to achieve his set goals.
It is necessary to give due considerations to technical coefficients along with techniques of organising the scarce resources in formulating plans.
Budgeting is the most informal and perhaps the simplest method of planning whereas
Budgets form a basis to determine the quantum of credit to be given to a particular farm
In partial budgeting we introduce minor changes but in complete budgeting we contemplate complete transformation in enterprises bringing about desired changes in methods of production, techniques of adoption, etc. It thereby means that new potential enterprises can be selected to replace the traditional ones.
In partial budgeting, only a few alternatives with a good range of profit are considered, while in complete budgeting all the possible alternatives without omission are tried, and the best one is selected in terms of profits.
Enterprise budgeting is a kind of partial budgeting, but, strictly refers to one enterprise in terms of its importance and frequent use in farm planning.
It is a pre-requisite for the preparation of partial budgeting, complete budgeting and programming models.
6.0 TUTOR-MARKED ASSIGNMENT
1. Define the following terms;
i) Farm planning ii) Enterprise budgeting
2. What are the advantages of budgets?
3. Differentiate between partial and complete budgets.
410
7.0 REFERENCES/FURTHER READING
Nelson, A. G. & Murray, W. G. (1968). Agricultural Finance. USA:
Iowa State University Press, Ames.
Olukosi, J. O. & Alamu, J. F. (2013). Introduction to Agricultural Finance: Principles and Applications. Nigeria: Great Glory Publishers.
Reddy, S. S. & Ram, P. R. (2004). Agricultural Finance and Management, New Delhi: Oxford & IBH Publishing Co. PVT.