AEE 301: FARM MANAGEMENT, RECORDS

AND ACCOUNTING
DEPARTMENT OF AGRICULTURAL AND FOOD ECONOMICS
UNIVERSITY FOR DEVELOPMENT STUDIES
TAMALE, GHANA.
Lecturer: Dr. Osman T. Damba
otahidu@[Link]

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•This course is a pre-requisite for Production Economics and Farm Management in the final
year.

•If you intend coming to AEE & AFE then you must do very well in this course and other AEE
& AFE courses.

•In this course we are going to make use of many of the things you studied in AEE 201 so
please go and revise.

•We may also need some of your Introduction to Agriculture.

Aim of the Course

•If you happen to be employed as a farm manager you should be able to perform

•You should be able to give advice to farmers and be a good consultant

•You should be able to teach others

•The most important, think of going into farming after school and succeed.

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COURSE OUTLINE
•MEANING AND SCOPE OF FARM MANAGEMENT
•THE DECISION-MAKING PROCESS
•BASIC PRINCIPLES OF FARM MANAGEMENT
•IMPORTANT CONCEPTS FOR FARM MANAGERS
•Law of diminishing returns
•Principle of substitution
•Farm Costs
•Gross Margin and Farm Profits
•Opportunity costs
•Comparative advantage
•Supplementary enterprise
•GOALS OF FARMERS AND FARM MANAGERS

•DECISIONS TO BE TAKEN IN CARRYING OUT A FARM BUSINESS

•Customs, norms, taboos
•Land acquisition and tenure
•FARM PLANNING
•Definition of farm planning
•Approaches to farm planning
•Appraisal of resources
•Plan for land use
•Plan for animal programme
•Plan for input of labour, power and machinery
•Plan for finance of the programme
•Plan for supplies, procurement and marketing of produce
•RISKS AND UNCERTAINTIES IN FARMING
•Meaning of risks and uncertainty
•Types and sources of uncertainties
•Adjustments to risks and uncertainties

•FARM RECORDS
•The need for farm records
•Types of farm records
•Inventory record
•Production record
•Income and expenditure record – balance sheet, income statement*
•Supplementary/Special record
•Farm inventory: valuation and depreciation
•Analysis and use of farm records*
•FARM BUDGETING
•Definition of farm budgeting
•Types of farm budgets
•Steps in budgeting
•Introduction to Linear Programming (graphical method)

•*FARM ACCOUNTING
•Basic principles
•Single-entry and double-entry accounting
•The trial balance
•The final accounts
•PRACTICAL
•Farm mapping
•Household farm record keeping and accounting
•Analysis of records
•Computer models

REFERENCES/ Relevant Text

•Adegeye, A.J. and Dittoh, J.S. (1985) Essentials of Agricultural Economics. Impact
Publishers, Ibadan, Nigeria
•Anaman, K.A. (1988) African Farm Management: Principles and Application with Examples.
Ghana Universities Press, Accra
•Anderson, J.R. and Dillon, J.L. (1992) ‘Risk Analysis in Dryland Farming Systems’. FAO,
Rome. 1992.
•Cramer, G.L and Jensen, C.W (1994) Agricultural Economics and Agribusiness John Wiley
and Sons Inc. USA
•Ellis, F. (1993) Farm Household and Agrarian Development. Second edition Cambridge
University Press pp 83-89.
•Johnson, D.T. (19--) The Business of Farming: A Guide for Farm Business Management in
the Tropics 2nd edition
•Kay, R.D. and William, M.E. (1994) Farm Management McGraw-Hill Series in Agricultural
Economics. McGraw-Hill Inc.
•Lipton, M. (1968) ‘The Theory of the Optimising Peasant’. Journal of Development Studies.
Vol. 4 No. 3 pp. 327-351

•Robbins, S.P and De Cenze, D.A. (1995) Fundamentals of Management: Essential

Concepts and Applications. Prentice Hall. NJ
•Royal Society (1992) ‘Risk: Analysis, Perception and Management’. Royal Society. London
•Runge-Metzger, A. (1993) ‘Farm-Household Systems in Northern Ghana’ In: Farm
Household Systems in Northern Ghana: A Case Study in Farming Systems Oriented
Research for the Development of Improved Crop Production Systems (eds) Runge-Metzger,
A. and Diehl, L. Verlag Josef Margraf, Germany
•Walker, T. S. and Jodha N. S. (1986) 'How small farm households adapt to risk' In: Crop
Insurance for Agricultural Development: Issues and Experiences (eds) Hazell, P., Pomarada,
C. and Valdes, A. Johns Hopkins University Press, Baltimore. p17-34
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MEANING AND SCOPE OF FARM MANAGEMENT

•Until recently, farming in Africa was considered a way of life rather than a business.
oAs a result, the purposes of production were not geared towards profit maximisation or
increase in farm net income.
•If farming should be considered as a business then it must be managed properly to achieve
the desired objectives of the business.
oWhat are these desired objectives?
•With the introduction of farm management, the emphasis was on the technical and
biological aspects of production, hence the combination of some resources for maximum
yield.
MEANING AND SCOPE OF FARM MANAGEMENT
•In the course of the development of management, the economic and accounting aspects
were also developed.
oHence, farm management as it stands today does not only take into consideration
production but also economics.
•Farm Management comprises two important concepts: the farm and management. Let us
look at these.

Farm
•Many people mistakenly take a farm to be a place where crops are grown alone. Though
this is partially correct it is not technically right. A farm is also a place where crops, animal
and trees are grown and sometimes processed.

MEANING AND SCOPE OF FARM MANAGEMENT

•A farm is an area of land, and the buildings on it, used for growing crops and keeping
animals, or
•A farm basically includes all the land on which some agricultural operations are performed
by a person, either by his own labour, with the assistance of household members or hired
labour.
•We can have:
•Crop farm – tree crop farm, food crop farm
•Animal farm – poultry farm, livestock farm
•Fish farm
•Mixed farm which is a combination of the animals and crops on a farm.

MEANING AND SCOPE OF FARM MANAGEMENT

Management
Many people define management depending on the discipline and the expected area of
emphasis.
•Simply, management in general term is the control or making decisions in a business or
similar organization.
Other definitions of management include:
•Management is making decisions about choices facing the decision-maker, with the
decision being based on economic analysis.
•Management is a concern for the organisation and the running of daily operations in
achieving identifiable goals.
•Management is making decisions affecting the profitability of a business.
•Management is leadership and control of resources.

Farm Management
There are several definitions of farm management, which include:
•Farm management is the application of scientific and technical principles to the solution of
the day-to-day problems facing the farmer (or the farm).
•Farm management is also the practical aspect of the applied science of agricultural
economics, comprising the application of physical and biological sciences in keeping with the
economics of profitable resource allocation for maximising the farmers’ net farm income.
•Farm management is the act of applying business and scientific principles to the
organisation and operation of a farm.
Farm Management
•Farm management is the act of managing a farm successfully, as measured by the test of
profitableness (profitability)
•Farm management is a science dealing with the combination and operation of production
factors, including land, labour and capital, and selection of the kind and amount of crop and
animal enterprises which will provide maximum and continuous returns to the farm unit.
•Farm management is the study of the principles underlying the functioning of the farmer as
a business proprietor.

Farm Management
•These words are prominent in the definitions:
•Resource use – combination of resources
•Technology application/adoption
•Skills
•Organisation
•Operation
•To achieve goals and continuous returns to the farm unit
•Farm management therefore has a wide scope, from the planning stage of the farm, the
beginning of the farming process, and the day-to-day operations on the farm, the harvesting
and handling, processing and marketing.
•Management principles are applied at every stage of production.
•Management therefore involves taking decisions, implementing them and accepting the
results as the reflection of the effort you put in the system.

THE DECISION-MAKING PROCESS

THE DECISION-MAKING PROCESS
•How do FM take decision?
•The FM has several options and alternatives or bundle of alternatives to choose from that
demands the use of his skills.
•He takes his decisions after taking several factors into consideration and after doing several
analyses.
•The process begins with setting up goals:

THE DECISION-MAKING PROCESS

•The farm manager:
[Link] objectives for himself. This could be from the owner(s). In subsequent years it must
be reviewed. SMART (Specific, Measurable, Attainable, Relevant & Time-bound) objective
2. Plans to pursue the objectives
•Action plans/Objectives Activities
3. Takes decisions on implementation of the plan.
•Appraisal
4. Implements in phases as deem fit.
5. Builds in check and balances to control his plan, to check against deviation.
6. Must be prepared to take responsibility.
To do these ….the farm manager needs to depend on some economic principles and
concepts that will be discussed later.

Set objectives .-
- What do I want to achieve:
•Food to feed the family
•Highest profit/profit maximisation
•Feed an industry
•Prepare the land for use in the future e.t.c

- What resources are available to me?

•Land – type of soil, what crops will do well on that soil type
•Labour – permanent, casual, household/family labour
•Capital – for purchase of machinery and equipment, payment of services, other inputs etc

Sets objectives cont.-

- The Environment
•Political – government policies and conditions
•Social – cultural, traditional
•Economic environment - opportunities
- Forecasting and Planning
•Considering the principles
➢Analysing
- Post harvest situations
- Profitability – profit maximisation
-To choose from alternatives
In taking decisions these must be taken into consideration. The aim of the decision is to
succeed and achieve the set goal. After the decision is clearly made there is the need for
preparation and implementation.

BASIC PRINCIPLES OF FARM MANAGEMENT

BASIC PRINCIPLES OF FARM MANAGEMENT
Management in general is based on some basic principles. A principle is a fundamental
truth, the basis of reasoning, the primary element or general law.
The principles for management represent the fundamental laws on which management
practice is built. The management principles are:
[Link] of work
[Link]
[Link]
[Link] of command
[Link] of direction
[Link] of individual interest to the general interest of the farm
BASIC PRINCIPLES OF FARM MANAGEMENT
7. Remuneration
8. Centralisation
9. Scalar Chain – a line of authority
10. Order
11. Equity
12. Stability of tenure of personnel
13. Initiative
14. ‘Espirit de corps’ co-operation

•Division of work
There are many people employed by management and into management. Each person must
have a clear responsibility. Many conflicts happened in businesses because the work
schedules are not well spelt out.

BASIC PRINCIPLES OF FARM MANAGEMENT

•Authority
Each person in the business should be made to understand the extent of his/her authority.
Authority must also be properly applied.
•Discipline
Management must be disciplined in order to enforce discipline. Basic rules and regulations
should be put up and made clear to all members. Sanctions should be applied to offending
members

BASIC PRINCIPLES OF FARM MANAGEMENT

•Unity of command
Conflicting messages can derail the whole business. All management staff must know of
changes immediately they are made so that they all carry the same message to
subordinates.

• Unity of direction
Subordination of individual interest to the general interest of the farm
Personal interests exist in all businesses especially where the business is not jointly owned
but only employed. Where there is dissatisfaction among members it is difficult to put the
personal interests under that of the business. The business must come first before me.

BASIC PRINCIPLES OF FARM MANAGEMENT

•Remuneration
If you want people to do a good job for you then you must be prepared to give them what our
president call ‘a living wage’. The staff must be satisfied in a way so that they can give their
best. Good pay and incentives.

•Centralisation
• Scalar Chain – a line of authority
• Order
• Equity
• Stability of tenure of personnel
• Initiative
BASIC PRINCIPLES OF FARM MANAGEMENT
•Management is concerned with the primary purpose of an enterprise, which is, to provide
goods and services that are wanted by consumers (farm produce). It is also concerned
about employing the most economical and convenient methods. It is again concerned with
effective employment under socially acceptable guidelines for all levels of operation and to
hold fort for the owner.
•Management responsibility is a continuous and living activity, which must not be replaced by
routines or operational techniques meant for lower level operatives in the absence of the
managers.

BASIC PRINCIPLES OF FARM MANAGEMENT

•No matter the size of the business (farm) the management process must be seen as a
unified process in which all the parts are interrelated and working towards a single purpose
or set objectives.
The management process is based on systematic diagnosis of the problem, finding the facts,
assessing and interpreting the findings, making decisions, giving instructions, ensuring
execution and checking the results.
•Management performance is judged by the achievement of plans or objectives,
effectiveness of operation and most importantly, the contentment of members of the
business. 14 principles are listed by Henry Fayol.

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IMPORTANT CONCEPTS FOR FARM MANAGERS
IMPORTANT CONCEPTS FOR FARM MANAGERS

Law of diminishing returns

•This law states the relationship between input of production (eg labour) and the output that
is produced (eg maize). Specifically, the law refers to the diminishing amounts of extra
output that we get when we successively add equal extra units of a varying input to a fixed
amount of some other input.
•Simply put, if you add more inputs to a fixed factor, the total product will increase at an
increasing rate at first, then a decreasing rate and eventually decline.

• e.g. If a farmer has 50 acres of land to use for production. Without the use of labour he gets
nothing.
•As he begins using labour from 10 and increases it to 20, then 30, 40, 50, production will
increase at an increasing rate.
•From 60 to say 70 the production will increase at a decreasing rate.
•Increasing the labour beyond 70 to 80 the output begins to decline.

Law of diminishing marginal output/product

•An increase in some input relative to other fixed inputs will, in a given state of technology,
cause total output to increase, but after a point the extra output resulting from the same
additions of extra inputs is likely to become less and less.
•This falling off of extra returns is a consequence of the fact that the new ‘doses’ of the
varying resources have less and less of the fixed resources to work with.
•This principle guides the efficient allocation of resources because it enables the farm
manager to employ additional labour/other inputs as long as the added return obtained by
the employment of additional input is greater than the additional cost of employing the input.

•The point of maximum use of the input is the point of inflexion. This point does not mean
you cannot increase output anymore but that after this point increase in input produces an
extra output that is less than the previous.
•This helps the farm manager to decide on how much of a product to produce and how much
input is required for maximum profit.

Principle of substitution
•Technology is changing rapidly and many technologies are being substituted.
•The principle of substitution allows the farm manager to substitute one technology with
another if the new technology increase his output and/or profit and that he is able to meet
the additional cost of the technology and the technology is available when needed.
•Eg SARI came out with maize production technology that yields up to 22 bags per acre.
This is a very good thing but farmers are not substituting their old practices with the new
one. Why?

- We can substitute hand land preparation with bullock ploughing.

- The use of tractors instead of hand weeding or bullocks

- The use of manure instead of inorganic fertiliser
- Planting in rolls instead of haphazard planting.
- Use of short duration planting materials instead of long duration e.g. early and late millet

•Each of these may have one advantage or the other over the other.
•The farm manager in taking decision may decide to apply the principle of substitution in
order to increase profit.

Farm Costs
In the production process, some expenditures are made in order to come out with the output.
In the production of maize, the land, the tractor services, the labour charges, the seeds, the
tools used etc must be paid for. These are costs to the farm. These costs are divided into
two groups namely:
[Link] cost(FC) – mainly capital items, physical assets like buildings, tools, equipment,
land, and permanent labour
[Link] cost(VC)/Operating Cost – include all cost of seeds sown, fertiliser applied, and
hired/casual labour.
•If the capital items have been acquired already then, whether you produce or not the cost
has been made. Whether you produce or not you have to pay your permanent workers, rent
etc. These are fixed costs.
•Variable costs come with the performance of activities/operations. Without any operation
there is no cost. They also vary according to the quantum of operation e.g. services of hired
labour; the more the labour and the task the more the cost.
•TC = FC + VC

Gross Margin and Farm Profits

•Many farmers make mistake by declaring false profits. One may say I had GHc1,000,000 at
the beginning of the farming season. After the season I had GHc2,500,000 so I made a profit
of GHc1,500,000. They forget to take into consideration many things which were costs to
them e.g. land, household labour, tools, bullock that was used in ploughing, etc.
•In many cases, they talk about Gross Margin instead of Profit. It must be made clear here
that Gross Margin is not Profit.

•Gross Margin is the difference between the gross income earned and the variable costs
incurred in production:
• GM = TVO – VC
Where GM = Gross margin
TVO = Total value of output
VC = Variable costs.
•Farm Profit on the other hand is:
FP = TGM – FC
Where FP = Farm Profit
TGM = Total Gross Margin
FC = Fixed Cost

•The element of fixed costs come in before profit is declared because if that is not done the
profit shown will not be a good representation of the profitability of the enterprise or project
and hence wrong decisions will be made based on this.
•The fixed costs or common costs are costs that are common to the various enterprises on
the farm. e.g. A farm may have several enterprises like maize, cassava, poultry, sheep. It
has a tractor, a farmhouse, pick-up, one general manager, and some permanent workers. In
some cases, all these serve all the enterprises but their costs are not added to each
enterprise’s variable costs.

Example:
•E.g. Farming for the Future: It has a farmhouse, fence, tools, 3 permanent workers, and a
team of lecturers as supervisors/researchers. The amount of each of these used in a
production process is a fixed cost common to all the enterprises.
•There are 4 enterprises: Techno, Grazing, Orchard, Eco. Each does its own production but
uses the items listed above.
•At the end of each operating year, each of the enterprises will calculate its gross margin.
The sum of all the gross margins gives the Total Gross Margin of the farm. The total fixed
cost will also be calculated and subtracted from the TGM to get the farm profit.

•GMa =
•GMb =
Estimated fixed cost =

•To calculate the farm profit we need to subtract the fixed cost (sum of all overhead costs)
• FP = Gma + GMb + - - - - – FC

Uses of Gross Margin

•For planning – to decide which enterprise to go into and at what scale/size compared to
other enterprises. ** Gross margin suggests a linear relationship but this might not be true all
the time. E.g. 1 ha = 40 bags, 2ha = 80 bag, 10ha = 400 bags. Remember the law of
diminishing return.
•Helps in making first step decision
•This is possible if there is record of input and output
•Comparative standards
•Record of personnel use (labour)
Opportunity costs
•The opportunity cost of an enterprise is the value of the most profitable alternative
enterprise that must be foregone.
•With best resource allocation, the returns to all resources will be at least as high as their
opportunity cost otherwise profit will not be maximised.
•The farmer may choose the crop that gives lower gross margin for other reasons than profit
maximisation. The peasant farmer thinks about the staple food for the family before
considering cash crops.

Comparative advantage
•Simply put a country should specialise in the production of goods or services in which it has
a comparative advantage and import those in which it has a comparable disadvantage.
•Whether or not one of two regions is absolutely more efficient in the production of every
good than the other, if each specialises in the product in which it has a comparative
advantage (greater relative efficiency), trade will be mutually profitable to both regions.

Supplementary enterprise
•The manager may decide on a supplementary enterprise to add to the main enterprise.
•Supplementary Enterprises: Two products are said to be supplementary when an increase
in the level of one does not adversely affect the production of the other but adds to the
income of the farm i.e. enterprises which do not compete with each other but add to the total
income.
•It is the enterprise that does not increase the production of another or other enterprises. It
does not use any limiting resources. It can make productive use of scare resources.
•Supplementary enterprises differ from complementary enterprises.
•A complementary enterprise is one that increases its output while at the same time
increases the output of another enterprise within the same farming system. Complementary
enterprises are extremely rare and only exist for a very few combinations.

GOALS OF FARMERS AND FARM MANAGERS

•Every farmer has a goal for his business and so is the farm manager. The farmer’s goals
could be passed on to the farm manager in the case where the manager works for the
farmer. The goal depends on what the farmer has, wants, can get and is made up of.
•The farmer who sees farming as a business aims at profit maximisation, optimum profit. But
the peasant or subsistence farmer may have other goals rather than profit maximisation.
•The goals are influenced by the type of farm, the calibre of farm manager and the economic
and social environment in which the farmer operates and the constraints that the farmer
and/or manager faces.

•The government may have a goal of getting employment for the people hence establishing
a farm. The goal of such a farm is not necessarily profit maximisation but employment
creation. As long as the people are employed the goal is achieved. This type of farming
cannot be measured along the lines of profit. Attempts are made to break-even.
•A retiree may decide to go into farming. He may have to set his goal for farming, e.g. as a
pastime or hobby.

Often, goals of farming include:

•Profit maximisation
•Increase in sales – sale maximisation
•Satisficing goal – to keep the company/farm in business
•Maximum utility goal
•Balance sheet homeostasis goal
•Full-cost principle goal
•Managerial goal
•Peasant farm goal

•What are the goals of a commercial farmer in farming? E.g. Profit maximisation, feed an
industry or factory,
•What could be the goals of the peasant farmer in farming? Feed the family, cultural
purposes
•What could be the goals of government in farming? Create employment

DECISIONS TO BE TAKEN IN CARRYING OUT A FARM BUSINESS

•How do farmers make decisions and what factors affect farmers’ production
decision-making?
•Farmers have been and will be faced with taking production decisions. Decisions like:
(before production, production process, after production decisions)
[Link] combinations of crops and/or animals to produce –what should I produce. In doing
this you take into consideration:
•Gross margins
•Comparative advantage
•Complementary/supplementary
•Estimates from research
•Goal

[Link] size of farm to operate? How much should I produce?

Taking into consideration:
•Goal
•Diminishing returns
[Link] method of production to use given the available resources? How should I produce?
•Bullock/draught animal
•Tractor/mechanized
•Manual

4. What system of cultivation to be followed?

•Mixed cropping – what crops
•Sole cropping
•Eco
•Techno
[Link] or which part of the land to use for what?
[Link] kinds of machines to use and at what stage of the production process should labour
be substituted by machines?
•spray
•harvesting
•post harvest

7. How much of family labour will be available to me and how much should I use? How
much of hired/paid labour do I need?
•labour available
•control over labour
•cash availability to pay
8. What are the appropriate times for producing particular crops and/or animals?
•all at the same time
•plant others later
•same crops but at intervals
•poultry/animals to meet specific demands
•stagger production

9. How much of crops and animals to consume at home?

•how will this affect the goal
[Link] are the sources of funds available to farmer or manager?
How to use the funds properly for results?
•cash flow
•should be before production begins

[Link] what price to market the produce? What time to sell?

Where to sell? What are the problems involved?
●estimate prices using
•current prices
•previous prices
•cost of production
•Note: Always remember that the farm manager is responsible for the success or failure of
his plan. He will be held responsible by the farmer or management.

Social Considerations in Farming

Customs, norms, taboos
•Farmers/farm managers need to obey the rules, customs, traditions and norms of the area
where they farm. They need to take into consideration the people they are living or working
among.
•Given examples: Non-farming days
Crop festivals
•How do you handle thieves you catch on your farm?
•What will be your contribution to ceremonies in the community?
Funerals
Festivals
Other celebrations

Land acquisition and tenure

•Land acquisition and tenure systems have become very important in recent times in
agriculture.
• Some farm lands are turned into residential land
• Long litigation over land acquired (even properly) (many court cases)
• Relocating the farm after you have developed it like stumping
• Family members of the land rising against the farmer
•Why so? Land tenure system. – land invested in the chief, or clan

FARM PLANNING

•Farming is a complex business and requires careful planning and execution in order to
achieve set goal and succeed.
•It is the basis for which management decision are taken
•It implies thorough understanding of the goals of the farm.
•It requires intellectual effort, reflective thinking.
•It requires foresight and imagination.

Definition of farm planning

•Farm planning is simply the process of deciding such things as what crops to produce, in
what quantity and in what order, how many animals of various classes to keep and how to
manage them, what buildings, labour and power, equipment etc will be required.
•It is a decision-making process, a conscious determination of the course of action, the
basing of decision on purpose, facts and considered estimates.
•It is the preparation of an operational programme for a farm, which will ensure the
conservation of land and other resources and the efficient use of production factors, thereby
increasing the net income and satisfaction of the farmer/managers.
•There are two categories of farm plans: New entrant plan and Old farmer plan

Why plan?
•To achieve set goals/include profit maximisation
•Effective/efficient utilisation of resources
•For correct timing/systematic flow of activities
•To reduce risk
•For future/further planning
•For checking assumption
•For monitoring and evaluation
•For appraisal

Approaches to farm planning

•Appraisal of resources
•As discussed earlier, resources for production are capital, land, labour and entrepreneurship
or management.
•In the preparation of the farm plan the manager may have to appraise his resources to
know how far he can stretch each one before finalising his plan.
•During appraisal he answers questions like: How much of each resource is available to me?
How much of each can be committed to production this year?

•Plan for land use

•On a parcel of land the farmer/manager has to plan the use of the land.
•He takes into consideration the slope of the land, the type of soils at various portions of the
land, the presence of a river/stream or water body, rocks, big trees etc.
•All these help him to decide on where to put what.

•Where to put the permanent structures like: farm house, roads, animal housing, dam.
•Where to put tree crops, agroforestry; how to check run-offs and hence erosion; where to
practice mixed cropping, shifting cultivation, share cropping, rent to others.
•All these must be planned and the farmer/manager has the responsibility to plan his land.

•Plan for animal programme

•The animal programme planning include animals like:
•Large ruminant – cattle, donkey
•Small ruminant – sheep, goat
•Poultry – local fowls, guinea fowls, turkey, duck, pigeon
•Others – crab, grasscutter, rabbit, bee, snail (Non-Timber Forest Products)
•There is the need to decide on these, which ones to keep, in what quantities, how to go
about it, budget, resource requirement etc.

•Plan for input of labour, power and machinery

Why?
•To make sure that labour is not wasted
•To prevent labour shortage at critical periods
•To manage labour properly **
How?
[Link] the enterprises
[Link] their labour requirements – Labour profile – by calculating the labour requirement per
enterprise per month for the year. Peak and troughs of labour should be noted. The use of
past records or standards could be of help. The periods and quantities are considered.

3. What source of labour to use – family labour, permanent employees, casuals, contract
labour, communal labour, exchanged labour,
[Link] efficiency – such that permanent labour does not stay idle. Define working hours or
daily task

•Planning by intuitive but ordered sequence.

• Determine the available resource
• Develop the opportunities that exist within the imposed limitations to the business
•Note: Labour cannot be stored for use later. At the end of the farming period gross margin
per man-days will be calculated according to enterprises.

•Machine use plan

•What will they do?
•When will they do it?
•How will they do it?
•Can labour do it better or cheaper?
•Should machines be purchased or hired?
•What other uses can the machine be put to outside the farm?
•Operators

Plan for finance of the programme

•It could be long-term, medium-term or short-term financial planning.
•There is the need for budget and a cash flow to plan the financial aspect of the farm.
•How much is needed for the whole farm operation for the year?
•How much is currently available?
•How much can be gotten from credit/loan sources?
•How much can credit buying provide?
•How much produce is available that can be sold quickly for cash?

•Plan for supplies, procurement and marketing of produce

•Supply planning – this planning of things that should be brought to you by your suppliers.
•Procurement planning – the planning of the things to buy from the market.
•Marketing planning involves planning how to dispose off the produce. How? When? Where?

•Plan a poultry farm based on the objective of producing:

•50 crates of eggs a week (layers)
•500 broilers for 6 months
•for a period of 1 year

RISKS AND UNCERTAINTIES IN FARMING

Meaning of risks and uncertainty
•Risk is a probabilistic phenomenon where outcomes are unknown and can be predicted
only in a probability sense.
•It is the chance, in quantitative terms of a defined hazard occurring.
•It therefore, combines a probabilistic measure of the occurrence of the primary event(s) with
a measure of the consequences of that or those event(s).

•Uncertainty is any decision or outcome, which cannot be predicted precisely.

•In contrast to risk, the probability of an outcome cannot be estimated in an empirical or
quantitative sense for a situation of uncertainty.

•It is a situation where it is not possible to attach probability to the occurrence of the event.
•The likelihood of their occurrence is neither known to the decision maker nor by anyone
else.
•At best uncertainties can only be guessed.

•Farmers operate usually under risk and uncertainty.

•Several factors constitute risk in farming.
•These include
•climatic, economic environment, political and social environment.
•Other risk that could have economic side-effects are illness, death of family members or
animals, the cost associated with medication, a funeral, a wedding ceremony, dowry or loss
of labour, may have long lasting consequences.
•Adverse climatic conditions form the highest risk to farming because climatic elements’
behaviour cannot be predicted with precision.

•A look at rainfall data available in the Upper East Region show wide spread fluctuations
without observable trend and hence precise prediction is difficult if not impossible.
•Ellis (1993) lists some of the uncertainties as
•natural hazard,
•market fluctuations,
•social uncertainty and state actions and
•war.

•Small-scale (peasant) farmers in general face a lot of risks but farmers in the semi-arid and
arid areas are exposed to higher levels of risks. More to this, the future cannot be predicted
with precision meanwhile their economy is agriculture-based. Among the numerous risks are
the frequent and unpredictable droughts which affect crop production, animals and hence
livelihood, mainly because agricultural production is rain-fed.
•Anderson and Dillon (1992) say without doubt that, climate and its variability have been and
will continue to be the major determinants of the practice of dry land agriculture everywhere,
although the economic environment and the socio-cultural environment are also sources of
risk.

•Farmers in the semi-arid and arid areas have been grappling with the managerial
challenges involved in risk for generations and have developed quite sophisticated
approaches to managing their risks.
Types and sources of uncertainties
There are several types of uncertainties that the farmer faces but these are grouped into two
broad classes.
These are:
i. On-farm uncertainties
ii. Off-farm uncertainties

ON-FARM UNCERTAINTIES
Uncertainties related to the production process on the form.
These include:
Resource uncertainty & production uncertainty.

On-farm uncertainties -Resource uncertainty

•A. Resource uncertainty eg. land, labour, capital, management
➢Land
• lease right
•Sale by owner to develop (outright purchase)
•Rent

Loading…
Resource uncertainty cont’d
➢Labour –
•scarcity at peak periods
•Sickness
•High demand – unexpected competitor
•Labour unrest

➢Capital
•loan rite
•Promise not honoured
•Hence input supply problems

➢Management
•Sudden departure of management staff due to better job offer, further studies etc
•Taking a wrong decision based on wrong information etc

Production uncertainty
•Production uncertainty (very important)
•Imperfect knowledge is the main source of this uncertainty.
•Rain-fed and erratic rainfall pattern/seasonal fluctuation – nature plays a dominant role in
this respect and the uncertainties they bring about are beyond the control of man.
•Late rains, too early rains, scarcity of rain, short duration of rain etc. These could result in
insect and pest infestation, diseases in plants and animals. It could also affect seed viability
•A wrong use of fertiliser, pesticide or herbicide,

Production uncertainty
•Washing away by heavy rains
•Scotching by sun after fertiliser application
•Encourage bush fires
•Rains during harvesting periods
•All these affect yield and hence projections and goals.
• Theft/Stealing/Pilfering

OFF-FARM UNCERTAINTIES
These are uncertainties in agriculture that do not occur on the farm but negatively influence
agricultural production.
These include:
Price uncertainties, Technology uncertainties, Government Policy/Action/Institutional
Uncertainties

Price uncertainties
➢Price uncertainties
•Input price changes – this is very difficult to contain because output price cannot be fixed by
farmers
•Output price changes – affected by inelastic demand nature of agricultural produces,
uncontrolled supply because of perishability, and that there could be other substitutes.
Farmer do not control over price fixing.

Technology uncertainties
•Technology uncertainties
•The new developments need to be incorporated in farming business to maximise yield and
hence profit.
•Lateness makes others overshadow the small farmer
Government Policy/Action/Institutional Uncertainties
•Government Policy/Action/Institutional Uncertainties
•Subsidy reduction and removal
•Emphasis on some enterprises as against others hence support land use degree
•Credit for some enterprises
•Market/Distribution channels e.g. Cocoa by COCOBOD, Private purchasing
•Co-operatives are supported/assisted not individuals
•Political decisions – against opponents
•Barn some enterprises

Government Policy/Action/Institutional Uncertainties

•Other Credit Agents
•Social – taboos, gossips
•Power failure/rationing
•Death
•Superstition

**Others suggest 4 groupings as:

•Natural hazards
•Market fluctuations
•Social uncertainties
•State action and wars
**Three management areas:
•Production and technical risk
•Marketing or price risk
•Financial risk
Another grouping – Natural and non-natural
•Natural – flood, drought, etc
•Non-natural – Pricing, Policy, theft, bushfire etc

Effect/Impact of risks and uncertainties on farming

●Why are we interested in risks and uncertainties?
•They have some important effects on agriculture hence we need to know them and guard
against them.
• These affect the farmer, his family and the nation as a whole.
•Ineffective planning
•Goals not achieved
•Raw materials low, affect industry
•Credit affected, not able to pay back loan
•Family of farmer get into hunger and starvation, basic needs cannot be met
•Discourages the farmer hence produces less
•Importation – balance of trade

Adjustments to risks and uncertainties

Adjustments/safeguards taken depend on several factors like the size of the farm, wealth of
the farmer, family size, ability to take risks, goals, psychology of the farmer, education or
information he has.
Methods that can be used include:
•Diversification
•Flexibility – farm organisation and production methods/techniques and costs
•Liquidity and reserves

Adjustments to risks and uncertainties cont’d

•Selecting more reliable enterprises
•Farm/Animal/Crop insurance
•Capital rationing
•Inventory management
•Contract for prices and costs
•Guaranteed minimum prices/study price and market trends
•Spiritual [Link] and spiritual help especially in Africa
•Forward planning and budgeting
•Seeking more information

Adjustments to risks and uncertainties cont’d

Diversification
•It refers to producing more than one crop or allotting farm resources to more than one
enterprise. It tends to reduce income variability. It enables the farm manager more and fuller
utilisation of resources. Enterprises with lowest correlation of net incomes can be combined
eg Yam and cassava should not be combined because both require about the same
resource, hence affected by the same factors. Crops and livestock combination could be
best. When crops are to be diversified they should not have the same risk factors.
Adjustments to risks and uncertainties cont’d
Diversification could be achieved by two ways:
•Allocate additional resources to an enterprise in which he is not already engaged in.
•From among the existing resources, he may divert a part of them to produce different
products. This is more important and realistic.

Adjustments to risks and uncertainties cont’d

Flexibility – farm organisation and production methods/techniques and costs
•The farm plan should be flexible enough not rigid such that the manager should be able to
shift resources from one enterprise to another for better returns if there is the possibility of
improved yield/market than the previously planned or change production method. Eg
vegetables, cereals and pulses, dual purpose animals- sheep for wool or meat.
•The manager must be flexible in the level of fixed costs incurred due to the possibility of
adjusting production to take advantage of an opportunity. (Sale schedule revised).

Adjustments to risks and uncertainties cont’d

Liquidity and reserves
•Keep enough cash to meet varying costs and calamities that may befall the business. Bear
in mind the present value of money as against the future. Credit-reserves, unused credit.

Selecting more reliable enterprises/stable enterprise

•Records will show that some enterprises are more stable or reliable than others though they
all face some degree of risk. The farm manager may decide on going in for the more reliable
enterprises to escape risk and uncertainty.

Adjustments to risks and uncertainties cont’d

Farm/Animal/Crop insurance
•A more reliable method of adjusting for risks and uncertainties in business is insurance.
Unfortunately, most attempts at agricultural insurances have not been successful in Africa
but done in some developed countries. Other businesses are easy to insure and there are
several insurance packages and facilities.
•Animals could be insured or the whole farm – covering all the enterprises where the
insurance facility exists. Farm equipment and machinery, buildings of commercial farms are
easily insured. This is mainly in the form of insurance against damage and theft.
Traditionally, we have the extended family system as a form of insurance – sharing of
fortunes and misfortunes. (The Group Farm Concept)

Adjustments to risks and uncertainties cont’d

Capital rationing
•The farmer should ration his investment among different crops and equipment. He often
faces the problem of indivisibility of capital. He cannot purchase half a tractor or he may
have to purchase bullocks with bullock cart or may have to invest in bullock shed. If the
farmer puts all his capital in the purchase of a tractor and he is unable to perform some
operations on the farm he is bond to fail, hence the need to ration the capital at his disposal
pending the inflow of more.

Inventory management
•Inventory deals with stock, goods in store. Its management could be used to adjust against
risk and uncertainties. Times of stocking and times of sales of stock are essential. It is similar
to wholesale management.

Contract for prices and costs

•This involves going into contact (agreement) with buyers of produce or supplies of input
requirements in advance. Purchase or sale prices are agreed upon before production or
supply. This kind of arrangement forestalls against risks to both the farmer and the buyer. It
could encourage or discourage production depending on the end of negotiations. Eg Cotton,
Cocoa.

Guaranteed minimum prices/study price and market trends

•Though this method is not in use in recent times it is worth knowing. It is the situation where
government sets produce prices before the harvesting period. This price is most of the time
above the minimum market price. This makes sure that the farmer does not loss so much at
the peak supply period when prices normally go low.
•Studying the price movement of the produce on the market provides the manager
information on which to base the time of sales of his produce. He knows periods in the year
when we have peaks or troughs, the highest and lowest, high demand and low demand.

Spiritual

•In Africa, and among farmers, some risk situations are attributed to spiritual forces. As a
result spiritual solutions to some of the problems are important to them. For those who
believe in this their first preventive or curative method against risks and uncertainties is to
seek spiritual interpretation and action.

Forward planning and budgeting

•Proper planning and budgeting could be used to adjust against risks and uncertainties since
time, supply and demand are important. If the manager plans properly, he could prevent or
reduce the effects of risks and uncertainties if they should occur.

Seeking more information

•Information on the types of risks and uncertainties in the past, how they happened, the
times they occurred, how they were reacted against etc. Information is power.

** some people talk about ‘Group or communal action’ such as forming co-operatives for
input supply, production sales, farming operations etc could be important in adjusting for
risks and uncertainties.

The purposes of the adjustments are that they seek to:

[Link] income variability over time
[Link] output from falling below a minimum value
[Link] farm’s ability to withstand unfavourable outcomes, enhance survival of the business.

•Risks could be reacted to in one of three ways described as: Risk Neutral, Risk Averse and
Risk Taking (Ellis 1993).
•The risk taker prefers to take the chance at the largest possible profit even though he knows
the harsh consequences of a failure (high risk).
• The risk averse prefers the safety of acting as if the worst possible outcome will happen
knowing well the other better possible outcomes. He does not deliberately take any risk at
all.
•The risk neutral actor is in-between. He prefers the average where he does not get the best
during ‘good’ years and does not loose too much during ‘bad’ years (he is indifferent).
•This disaster avoidance is what Lipton (1968) refers to as ‘Survival Algorithm’ of peasant
farmers. He argues that poor small farmers are of necessity risk-averse. They cannot afford
not to cover their household needs from one season to the next since, should they fail to do
so they will starve to death.
• Ellis (1993) describes this as a ‘safety first principle’.
• Anderson and Dillon think that as wealth or income of a household increases risk aversion
declines.
•It is realistic for small farmers who do not know of how to feed their families in case of the
odds to gamble with their source of livelihood. Small farmers will continue in this direction
until they have diversified enough to gamble with one livelihood source.
•The case of risk aversion assumed here might be a thing of the past. Farmers have
developed various non-farm activities (de-agrarianisation), and have gained confidence in
their extension officers hence, they turn to move away from risk aversion to risk taking at
least with part of their land used for food production.
•

•Risk neutrality is encountered very rarely among individual decision-makers (Anderson and
Dillon, 1992) but rather risk aversion. The non-neutral case of risk aversion is of more
importance, interest and generality (Binswanger et al, 1982). But the few risk-neutral need
not be overlooked since the major goals of most governments in developing countries is
rural development and poverty reduction.

FARM RECORDS
Farm records can serve as a powerful tool in farm organisation. They serve as a
management tool that helps in decision-making especially:
➢To identify the strengths and weaknesses of the farm. The human mind with all its
tremendous powers, cannot remember or recall everything all the time. Keeping records
makes information available for not only for the farm to plan and improve performance but
also other farmers. Peasant farmers keep records in crude ways; trees and rivers as
boundaries, markings on the wall for IOUs, etc.
➢The record kept can be analysed to identify possible problems and take corrective
measures hence ensuring greater chances of success for the farm in subsequent years.

FARM RECORDS
➢To ensure effective management of the farm, the farm manager needs extensive
information concerning past costs, revenues, inputs and quantities used, production, present
physical and financial conditions and the future costs, returns and production. These can be
acquired from farm records and also some off-farm sources.

FARM RECORDS
In each case there is
➢the physical aspect of the records and
➢the financial aspect of the record which shows the financial implication of each
transaction.
➢Record are kept daily, weekly, monthly, quarterly or annually depending on the enterprise
and the type of record kept and the management system.
➢However one important principle of record keeping, to ensure accuracy, is filing of records
as soon as possible after the transaction.
USES OF FARM RECORDS
The farm manager may use the information from farm records for:
1. Making production decisions
•What to produce?
•How much to produce?
•Gross margins to compare
•Price movements and quantity to produce
•Yields per hectare and over years
•Fertiliser input per hectare
•Number of eggs per hen?
•Number of pigs weaned per litter?
•Number of pigs weaned per sow per year?
•Amount of cow milk produced per cow per month

Uses of farm records cont’d

2. Evaluating the performance of the farm or farm enterprises within a given period of time.
•What are the goals?
•Did we achieve them?
•Why/why not? What went wrong?
•Periods – the production process

3. For credit purposes

•Banks
•Creditors
•Past record and future plan

Uses of farm records cont’d

4. Taxation and insurance purposes

•Important in filing tax returns
•Important for insurance purposes

5. Farm planning and budgeting

•Estimates – numbers
•Estimates of prices
•Outputs/yields
•Value of dairy sales per cow per month
•Income from the various enterprises

Uses of farm records cont’d

6. National agricultural and economic planning
•Animal budget
•Input supply
•Estimate demand and supply
•Deficits
•Policy future
7. Resolution of disputes over assets especially land.
•Double ownership
•Family members’ dissatisfaction

The farm manager employs clerks to keep records. Some managers keep the records
themselves. In cases of the farmer not been literate his children or friends assist him.
(Discuss traditional record keeping, its advantages and disadvantages.)

•Who need records?

•Government for - - - -
•Researchers for - - - - - -
•Farmer himself for - - - - -
•Extension agent for - - - -
•Other farmers for - - - - -

TYPES OF FARM RECORDS

Four (4) major classes/types of records

[Link] Records (includes labour records separated by some text)

[Link] Records
[Link] Accounting Records/Expenditure and Income Records
[Link]/Special Records

major classes/types of records

1. Production Records (includes labour records separated by some text)

•Crops
•Livestock
•Poultry
•Fish Separate records for each of these enterprises.

Production Records cont’d

•Type of crop – variety, seed source, date planted, seed quality – germination rate
•Land size under cultivation
•Number of stands per land size
•Weeding dates, how, labour involved,
•Inputs – Fertiliser, chemicals, seeds?
•Tools and equipment used and for how long
•Harvesting
•Yield, post harvest handling – processing, preservation, storage

Production Records cont’d

•Livestock:

•Poultry:
•Labour records like personal information on permanent labour
•Number of labour use per day or per operation
•Wages (wage book) payments made – cash and kind
•Expenditures made on food, drinks, clothing,
•Record of man-hours of non-hired labour – family/communal
•Analyse average labour per operation
•Labour chart to be filled eg. Adegeye and Dittoh pg. 146-7

Major classes/types of records cont’d

[Link] Records

[Link] Accounting Records/Expenditure and Income Records

[Link] or Special Records

Supplementary records are kept because of their important role in farming. Such records
include soil maps, legal documents, farm layout/map, specific crop field maps, land records,
receipts and any other record that does not fit into the other records. Tape records, pictures,
written history of the farm/land, site plan, registration certificate, receipt of purchase of
equipment and machinery.

Question
You have identified that a farmer is not performing well and could be better if had kept
records. How would you convince the farmer to start keeping records?

Farm inventory: valuation and depreciation in inventory

●Inventory record is the complete count and evaluation of all assets and liabilities on the
farm at a specific date.
•It is a list of all physical properties of a business along with their values at a specified date.
It is a complete list of farmers’ assets and the first step in farm accounting.
• It is done at the beginning or end of each farm year. It must be at the same time each year.
The closing inventory of one year is the beginning of the other.

Why lnventory Records?

•Gives a list of all assets and their values hence shows what amount of capital accumulation
goes back into the business.

•It reveals the changes in net worth through comparison of farm inventories over years
hence a basis for computing growth.
•It enables the farm to measure management efficiency and other measurements.
•It help to determine depreciation costs
•Basis for income statement.
How is this done? Two ingredients:
1. Physical count and 2. Valuation (depreciation). This is where Valuation comes in.

VALUATION
There are many valuation methods. Each one has its merits and demerits. The farmer has
the right to use any but he has to choose the right one for the right asset.

Types of Valuation
1. Valuation at Cost.
The actual cost of purchasing the equipment or asset

2. Valuation at Market Price

Valuation at the market price of the asset at the time it is valued

Types of valuation cont’d

[Link] at net selling price
For assets that are meant for sale.
Selling price – marketing cost = Net Selling price

[Link] at cost less depreciation

Cost minus depreciation. This is mainly used for machines
[Link] by reproductive value/replacement cost

DEPRECIATION
•It is the slowly using up or loss of value of an asset due to age and usage.
•There is use depreciation due to function of time and usage and
•Time depreciation due to obsolesce occurring regardless of usage
•Economically, it is the decline in an item’s value due to decline in its ability to produce
income now and in the future.

•We need to depreciate some of the assets to get the value – so sometimes valuation is
done through depreciation.

THERE ARE THREE (3)MAIN TYPES OF DEPRECIATION

[Link] line depreciation

Annual Depreciation
= Purchase price(Original cost) – Scrape value
Expected Useful life

•Salvage value is the remaining value of the asset after its expected useful life has been
covered.

•This type of depreciation is the most use because it is convenient and easy to use but some
assets depreciate unevenly hence may not be the best for such assets.
Advantages of Straight line depreciation:
●Cost of asset is written off within a definite period
●The charge is uniform all the time
●Easy to calculate
2. Diminishing Balance Method
In this method a fixed rate is use each year and applied to the value of the asset at the
beginning of the year i.e. the remaining balance.
Each year the remaining balance is used (not original value) hence it changes every year.
Annual depreciation=(fixed percentage ) x (remaining book value at the beginning of the
year)

E.g. if as asset is bought for 100 dollars and the depreciation rate chosen is 10% the
depreciation schedule will be as follows.

Year Value Annual Depreciation

1 100 10
2 (100 – 10) = 90 10% of 90 = 9
3 (90 – 9) = 81 10% of 81 = 8.1
4 (81 – 8.1) = 72.9 10% of 72.9 = 7.29
5

•The last value at the end of the useful life is the scrape value. This method is mainly used
for machines.

Advantages of Diminishing Balance Method

●Same rate is used
●Gives room for maintenance cost which becomes high over time
●It is more realistic for machines.

3. Sum of the Years – Digits Method

It is used to distribute depreciation heavily in the early years of the asset. It is given by:
Depreciation= (Remaining number of useful years at the start of the year x total
depreciation)/sum of digit of useful life

Or
or
Depreciation = 2D (n – a + 1)
n(n + 1)

where: D = Value (cost price – scrape value)

a = year number (the year)
n = Useful life
The sum of all the depreciation gives the value.

Selection of Method of Depreciation

Selection of Method of Depreciation to use depends on the purpose and the farmer decides
on which method to use. Sometimes the 3 depreciation methods are used and a choice it
made from the observations. It is also done based on :
[Link] type of property/asset
[Link] the resulting book balance is going to be used for
[Link] method which best approximates the loss in the value of the asset
[Link] of computation

•Straight line method is the easiest to compute and understand hence the most commonly
used. Sum of the years-digit and declining balance methods give similar outputs.

•Note these: Item, date of purchase, cost price, salvage value, useful life, book value.

•There are other types of depreciation methods which are not often used. They are:
[Link] Revaluation Method. In this case depreciation is the difference between the last
year’s valuation and this year’s valuation. It is used for working animals, breeding stock,
assets that are likely to appreciate in value. They appreciate instead of depreciating. This
occurs also during high inflation periods.
[Link] Method
[Link] Adjusted Method
[Link] Interest Method

Problems in Computing Depreciation

•Determining life usefulness / useful life of an asset
•Reconditioned machines
•Second hand machines
•Appreciation of assets instead of depreciating.

Q. What are the advantages and disadvantages of each of the valuation methods? Give
examples of properties that might be valued by each of the methods. What type of property
could not be valued by each of the methods?

Q. The purchase cost of a farm machine is ¢6,000,000. The deduction percent is 20% of
the remaining book value of the machine. The estimated useful life of the machine is 10
years, with a salvage value of ¢500,000 where appropriate. Use as many depreciation
methods as you know to calculate the depreciation schedules and compare them.

ANALYSIS OF FARM RECORDS

•Raw data collected or recorded on the farm will have little value unless they are properly
managed, including: summarising, tabulations, editing and analysing.
•This will show the proper measures of income and the computation of management and
efficiency factors for the farm.
•This will also show the factors which affect the farm’s success or failure so that an individual
farmer by comparing his performance with these measures or standards may be able to
recognise his weak points and take necessary steps for improvement.

Analysis of farm records cont.

He must perform:
•Yield analysis
•Profitability analysis
•Trends
•Land-use effects
•Timing analysis/dates of events
•Rainfall pattern and effect
•Input/output analysis
•Efficiency analysis – capital efficiency,
•Cost ratios/operating cost ratio
•Overhead charges (fixed ratio)

Analysis of farm records cont.

•Gross ratios i.e. capital per unit of Gross income etc
•Net returns per land cultivated
•Net returns per output of crops
•Net returns per number of people employed
•Crop yield index (CYI) = Actual crop yield x 100
Normal or average crop yields
•They indicate financial positions and strength of the business. It also provides a standard for
comparison between different sizes of farms and for a particular farm over a period of time.

FARM ACCOUNTING

INCOME AND EXPENDITURE RECORD

●Daily Record
Daily records of activities on the farm are kept in what is called the Journal or Daily Diary. It
records all transactions chronologically or on a day-to-day basis.
Eg. Journal of AEE Farm (January 2003).

No. Date Item Qty Amount Remark

1 02/01/03 Seed maize bought 19 bags 2,000,000
2
3
4

Two main financial records are needed by the farmer.

They are
•The Balance Sheet/Net-worth Statement, and
•The Profit and Loss Account/ Income Statement.

The Profit and Loss Account /Income Statement

•It shows the summary of all revenue and expenditure of the farm over a particular period,
normally one cropping season or one calendar year. It is also known as Profit and Loss
Statement. It is so called because it shows finally the profit or loss of the farm during the
period.
Income Statement

BALANCE SHEET
•Balance Sheet also known as Net-worth Statement is a summary of assets and liabilities of
a business, together with a statement of the owner’s equity. It gives the summary of the
financial position of the business at a point in time.
•It is a snap-shot of the business at one point in time when it was taken. The end of one
balance sheet is the beginning of the next. It is a picture of the business at the time it is
taken.

The balance sheet has two characteristics:

[Link] always refers to a specific date or a point in time.
[Link] always has three divisions/parts
•Assets
•Liabilities
•Equity – positive or negative

For every balance sheet:

Equity = assets – liabilities

i.e. Assets = liabilities + owner’s equity

•Assets are all things that the business owns

•Liabilities are all things that the business owes to others to be paid for.
•Equity is the share of the business that belongs to the owner(s) of the business i.e. what
becomes theirs if the business should be liquidated.

ANALYSIS PERFORMED FROM THE BALANCE SHEET

Some common analysis performed from the balance sheet data are as follows:
[Link] Capital Ratio (NCR) is the ratio of the total assets to total liabilities
NCR = Total assets
Total liabilities
It has no unit. This measures the farm’s degree of financial safety or solvency. If the ratio is
greater than one, the farm is very safe. If it is one, the farm is on the edge while less than
one, the farm’s financial situation is bad i.e. it is in debt in the immediate/short-run.

2. Working Capital Ratio (WCR) is the ratio of the sum of working and current assets and
the sum of the medium-term and current liabilities

WCR = Sum of working and current asset

 Sum of medium and current liabilities
This measures the degree of financial safety over an intermediate period of time.
(Interpretation is as before) If the ratio is greater than one, the farm is very safe. If it is one,
the farm is on the edge while less than one, the farm’s financial situation is bad

[Link] Capital Ratio (CCR) is a measure of the liquidity of the farm or the ease with which
the farm assets can be exchanged for money and is defined as:

CCR = Current assets

Current liabilities
If it is less than one it cannot pay its liabilities when they fall due in the short-run.

4. Leverage Ratio = Total liabilities = 1

Total assets NCR
Net Capital Ratio =NCR

It measures the fraction of the total assets that is taken by the total liabilities. It gives the
proportion of the total farm assets that can be used to pay all farm debts and obligations.

L.R. under 0.5 is normally considered healthy for a farm. If L.R. is one (1) or more, the farm
is theoretically bankrupt of ‘broke’ since the total liabilities exceed the total assets.

Computers in Agriculture
Computers are used in performing many operations.
Store data and information
Analyze data
Retrieve information/data
Word processing
Interaction – communication - e-mail, e-conference, e-commerce etc.
Human beings operate the computers. The kind of data you put into the computer is the kind
that it will store and analyse for you.

Most computers are under utilised considering the many functions they can perform

•Basic programmes or soft wares that the computer runs on are:

• Microsoft Office which includes: Word, Excel, Power Point, Access, etc.
• Others are SPSS, M-Stats etc
•The aspect of use for analysis is not very much, minimal. Mostly it is for writing letters,
reports – word processing.
•Also information dissemination with the use of power point
•Payroll management using spreadsheets
•Physical and financial record keeping
•Farm accounting
•Budgeting
•Linear Programming (alternative planning)

FARM BUDGETING
•What is budgeting?
Definition of farm budgeting
●Budgeting is the monetary expression of a plan in terms of receipts, expenses and net
income.
• Hence, budgeting is the process of estimating costs, returns and profit of an enterprise.
•Budgeting refers to a well-knit programme of farm activities and methods to be adopted by a
farmer to achieve his objective. Changes in techniques, prices and inputs lead to major
adjustments in agricultural operations.

Budgeting is a mechanical vehicle for calculating profit and for looking at probable results of
plans and action. It is the detailed quantitative statement of a farm plan or a change in farm
plan and the forecast of its financial results.
It is made up of two aspects:
•the physical aspect of the plan i.e. what to produce, how to produce and the resources
needed - description of activities to be carried out.
•the financial aspect of the plan i.e. the expected costs and returns and hence profit.
Hence budgeting is part of the planning process. It is based on several assumptions.

Importance of budgeting:
•It helps in projecting future costs and predicts expected returns from production.
•It also helps to guide farmers in choosing between farm enterprises most likely to fulfil the
objective(s) of the farm.
•Managers and /or consultants often need a quick way to assess the financial effect of a
proposed change in farm policy or prices in a farm business where the overall farm
organisation is unchanged eg the decision to hire a sprayer instead of buying one,
substituting a beef herd with cash crop etc. This is answered by the budget.
•A plan without a budget doe not mean anything.

Types of farm budgets

There are three types of budgeting. These are:
•Complete budgeting
•Partial budgeting
•Break-even budgeting

Most books consider complete and partial budgets hence the most common.

Complete Budgeting
•It involves the whole farm system so all expenses and receipts likely to be incurred are
included.
•It is a sum of series of partial budgets.
•It is a statement of objectives, strategies and expenses involved in the completion of a
complete plan pertaining to a single farm.
•Complete re-organisation of the farm is called for and an elaborate plan drawn up regarding
the crops, livestock, methods of cultivation, costs and benefits/profit.
•The farmer needs then to prepare both a long-term and a short-term plan.
Complete budgeting is required for:
•A new entrant (new farmer)
•When there is a major change in technology and methods of production
•When the size of the farm changes drastically. A large basic change that affects all the farm
costs and returns

•Q. Kofi upon the advice of a consultant is contemplating re-organising his 50 ha mixed
farm of maize and citrus to accommodate dairy cattle, beef cattle, goat, maize and cotton.
He needs to do a complete budget and compare with the existing one before taking a
decision. How will the budget look like?

Partial Budgeting
•It is a marginal analysis technique as it only looks at the changes in cost and receipts
(returns) and also net farm income likely to result from marginal change in farming system. It
may be used to choose a plan out of series of plans or modified plans. It makes use of the
stage II of the production function.
4 basic questions arise:
[Link] new costs will be incurred?
[Link] former cost will be saved?
[Link] former income will be lost?
[Link] new income will arise?
These questions could be grouped as:

These questions could be grouped as:

•Additional costs: costs that do not exist at the current time with the current plan. This could
be from the purchase of an additional/new input or increase in quantities used or substituting
more of one input for another.

•Reduced revenue: An existing revenue that will be lost if the new plan is adopted, either by
elimination of an enterprise, reduction of the output of that enterprise, reduction in selling
price. This must be carefully done.

•Additional revenues: Revenues that were not in existence but will emerge as a result of the
new adoption eg the addition of a new enterprise, increase in size of current enterprise,
increase in selling price.
•Reduced costs: Current costs that will no longer occur due to the adaptation of the new plan
eg eliminating an enterprise, reduction in the input use, reduction of an enterprise size,
substituting more of one input for another, purchases at lower cost, elimination of some fixed
cost items.

Break-even Budgeting
•It is used when there is considerable doubt about the level of an important variable such as
yield or prices or both.
• Breaking-even budgeting can be employed to estimate the yield required to provide an
exact balance of changes in expenditure and returns/income so that the farmer is neither
better off nor worse off.
•E.g. Doubts about the benefits of purchasing a new machine calls for a break-even
budgeting.

Steps in budgeting
[Link] farming goals and farmers’ preferences
[Link] the farm resources available to the farmer
[Link] which of the resources are currently being used
[Link] the gross production
[Link] a statement of expenditure and income for the farm on the basis of current
utilisation of the farm resources
[Link] the input-output relationships such as labour and/or machine performance or
efficiency attained on the farm
[Link] the above with the standards available on other farms in the area
[Link] weaknesses – structural and operational

Steps in budgeting cont.

9. Determine priorities in correcting the structural and operational

weaknesses
10. Prepare a number of alternative farm plans and choose one as
the final plan to be adopted
11. Supervise the implementation of the programme under the
plan
12. Evaluate the results.

It is important to compare your budget with the actual at the end of the process. This will
help you sharpen your budgeting skills and also help in the evaluation process. It is always
better to have budgets very close to the actual.

Disadvantages of budgeting
[Link] assumes linear relationship and ignores diminishing returns and complementary
relationships between enterprises.
[Link] yields and prices particularly for new farmers becomes a problem
[Link] budgets may be needed before a high-profit plan is obtained and even then, there is
no way of knowing the existence of other profitable plans.

Cash Flow Budget

•It is important in
[Link] farm development projects
[Link] loans
[Link] to cope with cash crisis
[Link] between alternative farm plan
[Link] actual against budgeted results, so enable corrective action to be taken.
Cash flow budget is designed for the farm adviser to assist the farmer in planning his future
activities, either on a short-term i.e. monthly, quarterly or year-long, or medium-term 2-5
years. It gives continuous feedback or monitoring during the period of the programme. It
includes: operating receipts, capital sales, operating expenses, capital expenditures, family
expenditures, monies borrowed, payments of monies borrowed.

•A cash flow chart is simply a month by month or quarter by quarter comparison of the
expected cash income and expect cash expenses along with the expected cash position at
the end of each month or quarter.
•It may not be exactly the same as actual but it should be close enough to be a useful
planning tool.

Introduction to Linear Programming (graphical method)

•Management has the problem of limited set of resources which it has to use to achieve
certain end, mostly optimum solution.
•Operations Research helps to solve some of these problems (mainly the allocation model of
operations research).
• Operations Research is the application of mathematics and other sciences to management
problems.
•LP may be defined as the maximisation or minimisation of a linear function of a number of
variables which are subject to restrictions expressed in the form of linear inequality.

•It is a mathematical technique that is based on matrix algebra, similar to Programming

Planning. It has a wide scope and can be done by the use of the computer. It offers an
elegant theoretical solution to certain farm problems given certain assumptions. The stated
objective is either to maximise or to minimise while satisfying various linear constraints.

The elements of a linear programme are:

•Production possibilities of a farm
•Their resource needs
•Gross margins (net returns/revenue)
•Resource constraints

•These are put into a matrix to give the optimum plan. The linear programming technique
depends on obtaining:
•A set of non-negative constraint equations describing the resource(s) to be studied – any
problem that can be formulated as the maximisation or minimisation of a linear objective with
several linear constraints can be solved by linear programming.

Ainput + Binput ≤ constraint

Cinput + Dinput ≤ another constraint
Eoutput + Foutput – Ginput ≤ constraint
(Formulate an objective function – a set of linear constraints and a set of non-negative
conditions
Max A = Σ PjXj
Subject to
Σ aijXj ≤ bi,Xj ≥0
I = 1,2,3, …m j = 1,2, …. n

b. Find optimum mix of resources to maximise profit (or minimise cost) from the known
cost constraints.

Advantages
•Solves complete complex problems simply
•Computer can be used
•
Disadvantage
•It needs the presentation of planning data in a way that needs special skill
•Its advantages are removed by the inadequacy of data available
•Its assumption of linearity, ie that however many units of an activity are included in the plan,
unit costs and returns are constant is often wrong.

Uses
•Planning production functions to maximise profit
•Finding least cost feed mixes to meet stated nutritional standards
•Planning the best mix of finance – equity, loan, preference etc
•Indicate plan for models or representative farms – where there is much homogeneity
between farms and the solution can guide the planning of individual farms.
•Government to find optimum settlement holding, size for a family
•To indicate the changes in farming systems that should follow changes in prices, costs,
labour supply or technical improvements.

Linear Programming is based on the following assumptions:

[Link] assumption: implies that the objective function to be maximised is
proportional to the activity.
[Link] assumption: indicates that cross-product terms are not admissible. Hence there
are no interactions between any of the activities e.g. Sorghum and maize mono crops and
sorghum and maize intercrop.
[Link] assumption: implies that the units of activities or enterprises can be divided into
fractional levels so that non-integer values for the decision variables can be used.
[Link] assumption: indicates that inputs and output prices, production coefficients are
known with certainty.

There are several methods of solving L.P problems. Some are:

[Link] method
[Link] method
[Link] method
At this level we will be interested in the graphical method.
E.g. We attempt to solve the problem by graphing the resources and the constraints under
different assumptions. It is a very useful method of solving two-dimensional L.P problems

Maximise π = 10.00A + 15.00B

Subject to the constraints:
10.7A + 5.0B ≤ 2,705 ---- cutting capacity
5.4A + 10.0B ≤ 2,210 - - - folding capacity
0.7A + 1.0B ≤ 445 - - - packaging capacity

Solution: set A = 0 then B = 2705/5 = 541

Set B = 0 then A = 2210/5.4 = 409.25

FARM ACCOUNTING
FARM ACCOUNTING
Basic principles
Journal or Daily Diary
•Records all receipts and expenses of the farm during a period on daily basis. It records all
transactions chronologically or on a day to day basis.
No. Item Date Amount Remarks
1. x xx xxx Revenue
2. x xx xxx Expenses
3. x xx xxx Paid
4. x xx xxx Credit

Record all transactions including farmer’s home consumption from the business output,
farmer’s home inputs used etc. In addition we have:
•Debit records
•Credit records
•Labour records
•Output records

Then to a ledger: a principal book for farm accounts into which transactions from the journal
may be transferred.

Single-entry and double-entry accounting

Advantages of Double-entry
•Improved accuracy as the accounts can be kept in balance more easily.
•The ability to produce complete financial statement including a balance sheet at any time,
directly from data already recorded in the system.

The trial balance

A trial balance is a bookkeeping worksheet in which the balance of all ledgers are compiled
into debit and credit account column totals that are equal. A company prepares a trial
balance periodically, usually at the end of every reporting period.
•Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first
step towards the preparation of financial statements. It is usually prepared at the end of an
accounting period to assist in the drafting of financial statements.
•The purpose of a trial balance is to ensure that all entries made into an organization's
general ledger are properly balanced.
•A trial balance lists the ending balance in each general ledger account. The total dollar
amount of the debits and credits in each accounting entry are supposed to match.
•Therefore, if the debit total and credit total on a trial balance do not match, this indicates
that one or more transactions were recorded in the general ledger that were unbalanced.

•From a practical perspective, accounting software packages do not allow users to enter
unbalanced entries into the general ledger. This means the trial balance is not needed by
entities that have computerized systems. If a business is still using manual record keeping,
then the trial balance has more value, since it is possible to create unbalanced entries in
such a system.
•When a manual record keeping system is used, the trial balance is also used to create the
financial statements. This means that the account balances in the trial balance are manually
aggregated into the line items found in the financial statements.
•Auditors also use the trial balance. They request it early in an audit, and transfer the ending
account balances from this report into their auditing software. They then use audit
procedures to test these balances.

The final accounts

•Final accounts gives an idea about the profitability and financial position of a business to its
management, owners, and other interested parties. All business transactions are first
recorded in a journal. They are then transferred to a ledger and balanced. These final tallies
are prepared for a specific period.
•The preparation of a final accounting is the last stage of the accounting cycle. It determines
the financial position of the business. Under this it is compulsory to make trading account,
the profit and loss account and balance sheet.

•The term "final accounts" includes the trading account, the profit and loss account, and the
balance sheet.
Trading Account
•A trading account sheet shows the results of the buying and selling of goods. This sheet is
prepared to demonstrate the difference between selling price and cost price. The trading
account tally is prepared to show the trading results of the business, e.g. gross profit earned
or gross loss sustained by the business. It records the direct expenses of a business firm.
•According to [Link]- "The Trading Account shows the result of buying and selling
goods. In preparing this account, the general establishment charges are ignored and only
the transactions in goods are included."

Profit and Loss Account

•This account is prepared to ascertain the net profit/loss of a business during an accounting
year and expenses of an accounting year. It records the indirect expenses of a business firm
e.g.: rent, salaries, advertising expenditure, etc.
•Profit and loss A/C includes expenses and losses and income and gains which has
occurred in business other than the production of goods and services

Balance Sheet
•The balance statement demonstrates the financial position of a business on a specific date.
The financial position of a business is found by tabulating its assets and liabilities on a
particular date. The excess of assets over liabilities represents the capital sunk into the
business, and reflects the financial soundness of a company. Now it's known as the
statement of financial position of the company.