UNDERSTANDING FINANCIAL MANAGEMENT SKILLS NEEDED FOR FARMING Victor or O. Oko koruwa ruwa (Ph Ph.D) Pr Prof ofes essor sor of of Agricul icultural tural Ec Econ onom omics ics Univ ivers ersit ity y of of Ibadan Ibadan Wednesday, 22 November 1 2017
Outline of presentation ❖ Preambles ❖ Financial Management ❖ Farm Record and Accounting ❖ Financial Management and Agricultural Enterprises ❖ Tips for Preparing Feasibility Report ❖ Conclusion Wednesday, 22 November 2 2017
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 output 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. Wednesday, 22 November 3 2017
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 other. Wednesday, 22 November 4 2017
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 a decision making process which - It is crucial in profit maximization a involves: major goal of privately owned farms. Objectives, problem, information, - Aids access to investment capital analysis, decision, implementation, from financial houses Wednesday, 22 November responsibility, evaluation 5 2017
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 Wednesday, 22 November 6 2017
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 Wednesday, 22 November 7 2017
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 Wednesday, 22 November 8 2017
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 Wednesday, 22 November 9 2017
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. Wednesday, 22 November 10 2017
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 Wednesday, 22 November 11 2017
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. Wednesday, 22 November 12 2017
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 Wednesday, 22 November 13 2017
NETWORTH STATEMENT OF A MIXED FARM ASSETS LIABILITIES Item Value Item Value This Current Assets (Naira) Current Liabilities (Naira) Cash in Hand 500 Debts due for payment 500 determine the Stocks for Sale 1,500 Accounts Receivable 1,200 overall performance Working Assets Medium Term Liabilities Feed in Stock 500 Debts due for payment in a 12,000 of a farm Supplies 200 to two Harvested Crops 9,000 within a Fixed Assets Long Term Liabilities specified Land (including crops on land) 3,000 Mortgages 5,000 Buildings 10,000 Debts due for payment in a period- total Machinery and Equipment 15,000 long term Dairy Cows and breeding stock 15,000 value of asset Total Assets 55,900 Total Liabilities 37,500 less total Networth 18,400 value of Net Capital Ratio (NCR) = 55,900 37,500 = 1.49 Working Capital Ratio (WCR) = 12,900 liabilities 12,5 𝑃𝑃 = 1.03 Wednesday, 22 November Current Capital Ratio (CCR) = 3,200 500 = 6.40 14 2017
INCOME STATEMENT OF A MIXED FARM EXPENDITURE (DEBITS) INCOME (CREDITS) Item Value Item Value A snapshot of the Operating Expenses (Naira) Crop Sales (Naira) Machinery and equipment 400 Rice 5,000 production Upkeep Maize 3,000 cycle’s Labour hired 2,200 Yam 2,000 Fertilizers and other chemicals 650 Beans 2,500 performance and bought Other crops 1,200 Seeds and planting materials 1,000 shows areas Bought Total crop sales 13,700 Livestock feed bought 1,300 where Medicines bought 200 Livestock Sales Supplies bought 50 Cattle - expenditure is Milk 1,500 Total Operating Expenses 5,800 Pigs - high and which Poultry (chicken) 1,600 Eggs 2,200 enterprise is Fixed Expenses Other livestock sales - Taxes paid - bringing in high Interest payments 500 Total livestock sales 5,300 Insurance payments - revenue Management expenses - Other Receipts Total Fixed Expenses 500 Receipts from hired-out machinery 500 Wednesday, 22 November Total Cash Expenses 6,300 Gross Cash Income 19,500 15 2017
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