CHAPTER ONE: AGRICULTURAL ENTREPRENEURSHIP

INTRODUCTION
What is Agricultural Entrepreneurship?
Traditionally, agriculture is seen as a low-tech industry with limited dynamics dominated by
numerous small family firms which are mostly focused on doing things better rather than doing new things.
Over the last decade, this situation has changed dramatically due to economic liberalization, a reduced
protection of agricultural markets, and a fast changing, more critical, society. Agricultural companies
increasingly have to adapt to market changes (e.g., boycotts), changing consumer habits (e.g.,
organic/local food), more strict environmental regulations, food safety and product quality, biotechnology,
big-data, value chain integration, sustainability, and so on. These changes have spurred new entrants,
innovation, and new cycles of entrepreneurship within existing firms. It is recognized by politicians,
practitioners, as well as scientists that farmers and growers increasingly require entrepreneurship, besides
sound management and craftsmanship, to be sustainable in the future (McElwee 2008; Pyysiäinen et al.
2006). Recent studies show that agricultural entrepreneurship is not only wishful thinking or a new hype: it
has a profound impact on business growth and survival (Lans et al. 2016; Verhees et al. 2012).
But what is exactly meant by agricultural entrepreneurship? To start, there is no fixed definition of
entrepreneurship; a wide diversity of definitions can be found. In daily language, the term “entrepreneur” is
often interchangeably used with business owner, starter, someone who is self-employed, sole-trader, or
farmer, thereby confusing status (a position in society) with role (behavior in a particular position)
McClelland (1967).
Agricultural entrepreneurship is the profitable marriage of agriculture and entrepreneurship; more
specifically, turning your farm into a business. Most farmers regard agriculture as a combination of
philosophy and lifestyle, so in its broadest sense agricultural entrepreneurship binds together philosophy,
lifestyle, and business, yielding ideals that give you purpose and goals to strive for.
Agricultural entrepreneurship can also be functionally defined as the application of the principles of
entrepreneurship to agricultural and agro-based businesses or firms. Agricultural entrepreneurship is an
ongoing process that begins with the identification of values and ends with a strategic plan to address
critical management functions.
Agricultural entrepreneurship principles and techniques can help equip you with the strength and
motivation to break from tradition. An entrepreneur, according to Webster’s dictionary, is someone who
runs a business at his or her own financial risk. Thus, an agricultural entrepreneur is someone who runs
an agricultural business, farming in particular, at his or her own risk.
These principles are important for a beginning entrepreneur
a. Who has recently inherited a business,
b. An experienced farmer who is considering continuing his/her operations,
c. Or a retiring business owner who is looking to pass on the farm.
Basic principles of agricultural entrepreneurship for a farm to be sustainable, it must be profitable;
this is important for the survival of your farm. Agricultural entrepreneurs must have a positive attitude and
practice a sustainable type of farming that satisfies both personal and family goals.
The following are a few basic principles of agricultural entrepreneurship. Because agricultural
entrepreneurship involves sustainability, and sustainability requires profitability, this will be the guiding
principle of agricultural entrepreneurship: your farm must be profitable.
Many people believe the goal of being profitable is to get wads of money so that they can
spend it on what they want. These people pursue high-paying jobs and put in endless hours of
work to get rich, so that they can be happy.
The reason to make your farm profitable is simple: As long as you take in more money
than you spend, your farm can improve in fertility and have a potential for sustainability. A farm can
generate large sums of bills that need to be paid, and they can only be serviced if the farm is a
profitable venture. If your farm has to be subsidized with off-farm income, it is not sustainable in the
long run. Eventually, you will deplete your savings, or you will retire from your job.
 Even part-time farms should be profitable; each farm should be able to pay for itself. In
today’s small farm market, your only real financial security lies in your ability to sell yourself and
your products. You will be responsible for your own success or failure.
In conventional agriculture, a farmer simply raises the crop and then hauls it to the middleman to
sell. The middleman passes on the crop to the retailer and eventually to the consumer. To be an
“agripreneur”, a term coined by one author to describe an agricultural entrepreneur (Macher, 14 1999),
you must be your own middleman, selling your product directly to the consumer.
Agricultural entrepreneurship involves examining your operation as a whole. Its component parts
should support each other, and you should be aware of how efficiently each part is performing (i.e., whether
it is succeeding or failing).
In a factory job, workers simply screw part A into part B and never see the whole. In most
office jobs, each worker gets a piece of a project, or a single account out of several. But an
agricultural entrepreneur must be aware of each piece, each account, and how they are linked.
Your farm is the entire factory, the whole company, and you need to know how all of it works. To
see the whole picture, you must look beyond your farm, too. Is your product something you can sell in your
area? Are there new products that would be appreciated in the local community? How does what you raise
affect neighboring farms? How does what they raise affect you? What will be the overall effects in the local
region?
Agricultural entrepreneurship is the “thinking person’s agriculture”. You must plan carefully, for
both your farm and your family. Your plan should, among other things, include time for rest and recreation,
because this renews your spirit and gives you time to think about your farm and learn from what others do.
Farming is physical by nature, but it is not how hard you work, but how “smart” you work.
The difference between a conventional farmer and an agricultural entrepreneur is that the
agricultural entrepreneur does more thinking and less physical activity. If you wear yourself out physically
and mentally, you will accomplish nothing. Learn to enjoy the trip, as well as the destination.
In agricultural entrepreneurship, your reasoning process, backed by reading and research, enables
you to make decisions that affect or contribute to all facets of your farm and your personal and family goals.
A thinking person evaluates all of his or her options and tries to keep an open mind. An agricultural
entrepreneur takes the most useful of the new ideas and blends them with the best of the old, and applies
them to his or her farm in an individual style. To discover what will work and what will not require research,
experimentation, and thought.
For your farm to be sustainable, you must develop cropping and livestock systems that are
environmentally sound and socially acceptable.
For instance, ploughing up and down steep slopes will cause soil to wash away onto a
public road and is not environmentally sound because you lose a lot of healthy soil. Nor is it socially
acceptable, because everybody pays for the cost of the cleanup.
Similarly, huge feedlots of large numbers of concentrated animals are encountering more
and more opposition today, some even from neighboring farmers who are uncomfortable with the
thick stench of the animals’ excreta that are carried by the wind, and contamination of ground and
surface waters through leaching and surface runoff from the animal pens.
Lack of social acceptance will prevent this type of farming from being sustainable. One useful
principle of agricultural entrepreneurship is to avoid debt. Dealing with bankers is like selling through a
middleman. The farmer makes less profit because he has to pay interest and principal. As much as
possible for all projects, grow into the enterprise rather than borrow into it. The principle is to avoid debt as
much as you can and to make payments in line with farm production ups and downs. In addition, whenever
you try something new in the way of crops or livestock, do it on a small scale and grow into it while learning.
It could save you lots of money. Another mark of a good agricultural entrepreneur is to try to do things on
time. Timing is important because of the seasonal and cyclical nature of farming.
For example, if you want your cows to calve at almost the same time, you should
synchronize your bulling so that the bull is with your cows for only 60 days, or two heat cycles.
Close calving means more attention on your part, and a more uniform sized calf crop for selling
purposes.
Work can be minimized by planning your farm layout wisely. For example, create square or
rectangular fields to maximize the efficiency of your machinery; and plan placements of sheds and
 gardens for best access from the farmhouse and fields to save time and money. If you are raising
herd-type animals (for example, cattle, sheep, goats), maintain several animals of each animal type
whenever possible. Herds of animals are more content than one or two animals, who are always
wanting to rejoin the main herd. It is essential to keep careful financial and performance records
and a diary.
One of the most important things you need to know is the cost of production for each
enterprise. Furthermore, you need to take good care of your buildings, machinery and livestock.
Buildings and machinery that are well taken care of will always cost less to maintain and will rarely
need replacement. Obey your engine care instructions on machinery, and frequently inspect your
buildings and machinery for wear, weather damage, and general condition.
Livestock also respond better to treatment. Healthy, stress-free livestock will gain weight
more quickly, stay in better condition, and have better performance in birthing and raising their
young. Learn everything you can to keep your livestock healthy and unstressed, and make sure
they have adequate shelter, feed, and water.
If you want your farm to be both profitable and sustainable, take measures to maintain or
improve the fertility of the soil. Several processes improve and help, like composting on either a
large scale or small scale, applying animal manures to the soil, and green manures for cover crops.
Animal manures can be good for the soil. Crop rotations are vital to a sustainable farming system.
They enhance soil fertility and help control plant diseases, weeds, and erosion.
Soil fertility in a rotation is maintained by the growing of a legume or grass to provide
nitrogen and buildup of humus. Crop rotations also lend themselves to livestock usage; the
legumes and grasses in the rotations may be used for grazing and for hay.
Is Agricultural Entrepreneurship Different from “Normal” Entrepreneurship?
A classic question posed in debates about agricultural entrepreneurship is whether agricultural
entrepreneurship is different from entrepreneurship in nonagricultural firms. The answer is yes and no,
depending on the type of research question and research paradigm employed (Pindado and Sánchez
2017). Certain elements of entrepreneurship seem to be relatively universal, context independent (Rauch et
al. 2009) (e.g., the importance of opportunities, pro-activeness, risk taking, and entrepreneurial self-
efficacy), other elements are more dependent on the type and context of entrepreneurship (Lans et al.
2008) (e.g., entrepreneurial learning).
For studying agricultural entrepreneurship, the following characteristics have to be taken into
consideration:
The Agricultural Sector Historically, the agricultural working setting did not necessarily
educe entrepreneurial behavior. Over the last 50 years, in many western countries, agriculture
became a highly specialized domain focused on efficiency and productivity (Van der Ploeg et al.
2002). For instance, in Europe, postwar agricultural modernization was very successful for its
original aims, to provide food security. However, this system did not stimulate diversification and
innovative entrepreneurship. Farmers were trained to be craftsmen, producing food and fibers. The
Agricultural Entrepreneurship development of an entrepreneurial identity, skills, and behavior are,
consequently, not self-evident (Vesala et al. 2007).
The Direct Farm Environment Farms are strongly regionally embedded: A convenient
geographical location is therefore an important factor for entrepreneurial opportunities. The
opportunities to develop new activities are much bigger when the family farm is located in an
attractive region with other businesses, close to urbanized areas (providing a market), with good
infrastructure and a well-developed supporting network (Wilson 2008).
The Family Firm Agriculture is dominated by small family farms (Gasson et al. 1988). The
family farming culture and associated logic influences agricultural entrepreneurship. Unlike general
entrepreneurs, farming families are less driven by ideas of growth and profit maximization. Higher
priority is given to survival, preserving family heritage, autonomy, rural lifestyle, and passing
through a healthy farm on to the next generation (Jervell 2011). Moreover, family farms are passed
on through from father to son. This selection process creates communities lacking heterogeneity
with a strong tension toward conformity. The presence of other generations in the farm, in
combination with a conservative mentality, does not particularly stimulate change and innovative
thinking (Jervell 2011).
However, there are also examples of family farms where an entrepreneurial way of
thinking has been nurtured over the years, the existence of an “entrepreneurial legacy,” defined as
 the sum of the families past entrepreneurial behavior which shapes current views and motives of
entrepreneurship in the family firm (Jaskiewicz et al. 2015). See for a recent review on family-
farming the work of Suess-Reyes and Fuetsch (2016).
Gender Farm women play an important role in agricultural entrepreneurship. Farm women
are, in many cases, the ones who initiate and develop new on-farm business activities (Bock 2004).
The initial entrepreneurial behaviors of farm women are characterized by “fitting in and
multitasking.” Typically, farm women start by fitting their new activities into the existing farm and
combine entrepreneurship with existing farm and family duties (Bock 2004). However, farm women
change their strategy over time and develop themselves as more expert entrepreneurs: investing in
further development, taking risks and identifying, and presenting themselves as entrepreneurs
(Seuneke and Bock 2015).

CHAPTER TWO: AGROENTREPRENEURSHIP SYSTEM AND MANAGEMENT

INTRODUCTION
A system is a set of related parts coordinated to accomplish a set of goals. Any situation which
involves the handling or manipulation of resources may be structured by way of a system to produce an
output or goal. From a systems point of view, management in agriculture is concerned with transforming
agro-inputs into agricultural products or outputs.
Agro-entrepreneurship is a commercial activity undertaken as a means of livelihood or profit. As
such, like any commercial enterprise, an agro-enterprise is expected to make money, or create desired
impact; otherwise there is no sense in getting into the business. Agro-enterprise management is a major
component of agricultural entrepreneurship.
Management is a built-in function of agro-enterprise. Management is essentially a decision-making
process based on information and experience, in order to achieve desired goals and objectives. Agro-
enterprise management therefore is a dynamic decision- making process revolving around an agricultural
business enterprise, and falls within the domain of agricultural entrepreneurship.
The Agro-enterprise system Agro-enterprise is a system of interrelated and closely knit stages in
the life cycle of an agricultural consumer product. Agro-entrepreneurship encompasses all operations
involved in the production of farm inputs, the use of these farm inputs in the cultivation of crops or raising of
livestock, the various handling and processing of agricultural commodities, and the transfer of these
commodities to the end-users. Interspersed among these operations are the various support services that
provide logistics, coordination, financing, manpower, technology, information, policies and programs,
incentives and other services that lead to the achievement of a successful agricultural business enterprise.
The agro-enterprise system is made up of five major areas or subsystems, namely the input
subsystem, the production subsystem, the processing subsystem, the marketing subsystem, and the
support subsystem.
The input subsystem. This is the first subsystem from which all other agro-enterprise
subsystems emanate. Here, all inputs (e.g. fertilizers, seeds, machines, etc) are manufactured,
imported or distributed.
The production subsystem. Inputs are directly used for the production of an agricultural
commodity as an end-product in itself or as a raw material for the production of other products.
The processing subsystem. The commodities from the production subsystem are
transformed into various products. The levels of transformation depend upon the level of
processing, which can be as simple as washing and grading or as complex as chemical
alteration.
The marketing subsystem. This subsystem is concerned with the transfer of goods from
source to end-user. It includes all handling procedures and infrastructures that move the
commodities from one point to another. The marketing subsystem may take different routes,
namely;
1. The transfer of agricultural inputs from manufacturers to farm input users;
2. The transfer of commodities from production site to processing site; or
3. The transfer of commodities from processing site to wholesalers, retailers and
final consumers.
 The support subsystem. This consists of all the key players that provide services crucial
to the success of an agro-enterprise venture. These services are provided by institutions such as
government agencies, commercial associations, credit and financing institutions, research
organizations and cooperatives. Figure 1 is a schematic diagram of an agro-enterprise system,
made up of the five different subsystems.
Management aspects of agro-entrepreneurship
Whether the business is a farm family operation or an enterprise with hundreds of employees,
agroenterprise management takes into consideration an individual’s or organization’s ability to receive and
process information in order to devise competitive strategies that lead to a profitable and sustainable
undertaking, amidst rapid changes in the economic environment. The many considerations of agro-
enterprise management include;
1. Technological know-how,
2. Sources of inputs and raw materials,
3. Financing,
4. Local and international awareness trends in agricultural markets and marketing,
5. Agricultural products and by-products trends and innovations, and
6. A degree of knowledge of policy climate that affects the agricultural sector.
With the current developments and trends in business, agro-entrepreneurship employs
sophisticated management techniques to survive a tightly competitive business world.
The distinctive features of agricultural entrepreneurship
The production and marketing of agricultural commodities is based on the transformation of the
natural growth and reproduction of plants and animals. The biological processes of growth, development,
and reproduction are complex and have unique characteristics that result in problems which need to be
approached with an agroenterprise rather than an agricultural perspective. Some unique characteristics of
agricultural production are as follows:
1. Agriculture is peculiarly dependent on land as a factor of production. Land plays a dual
role. It provides the floor space over which plants spread out to receive sunlight and on
which livestock graze. Land also gives crop plants water and nutrients and acts as a
repository for biological processes necessary for growth of plants and animals. Thus,
the role of land in agriculture is different from its function in manufacturing where it is
merely a site on which factories are built. The biological nature of agricultural
production leads to unplanned seasonal and annual fluctuations and long-term
commodity market cycles. In addition,
2. The biological nature of agricultural production results in concentration of production in
certain geographical locations that are distant from the centers of consumption.
3. The perishability of many agricultural products results in the critical importance of
storage and processing operations, and agricultural raw products exhibit wide
variations in quality. Uncertainty and risk in agriculture are high, compared to say
mining and manufacturing. Sources of uncertainty and risk in agro-enterprise
management include those in production and yield, prices and marketing, financing,
adoption of new technology, natural hazards and casualty losses such as drought and
fire, legal, and human factors such as sickness and changes in attitudes towards
certain agricultural products like tobacco and red meat.
Agro-enterprises are heterogeneous in nature, ranging from small, family owned and operated
firms in which most labor is supplied by the family members and the proprietor is the sole supplier of risk
capital, to multinational conglomerates such as Coca Cola Company, Nestle, Unilever, and Heinz whose
financial sources are varied.
The production and marketing of food products have some additional unique features that receive
special attention by governments and business.
1. Firstly, all people require continuous supply of food.
2. Secondly, food products can cause human diseases if improperly handled.
3. Third, the food sector has a specialized and “big business” distributorship.
4. Finally, the food sector in high-income countries has a high level of product
differentiation in relation to other consumer products industries.
Downey and Erickson (1987) describe eleven distinctive features of agro-enterprise firms that
require managers to use management principles in a special way.
1. The first distinctive feature is the tremendous variety in the kinds of businesses in the
agro-enterprise sector. The kinds of business enterprises range from basic producers,
 shippers, brokers, wholesalers, processors, packagers, manufacturers, storage firms,
transporters, financing institutions, to retailers, food chains, and restaurants. Following
the route that a loaf of bread takes from the time it is seed to its positioning on the
consumer’s breakfast table would involve nearly every kind of agro-enterprise known
to civilization.
2. The second feature is the sheer number of agroenterprises. Literally millions of
different businesses have evolved to handle the route from the producer through to the
retail marketer.
3. The third feature is the intricate way in which basic agro-enterprises are built
principally around several million farm producers. These farmers produce hundreds of
different foods and fibre products.
Most agro-enterprises deal with farmers either directly or indirectly. No other industry is built
principally around the basic producer of its raw products. The infinite variety in size of agro-enterprises,
from very large enterprises to the one-person or one family organization, is yet another feature.
Most agro-enterprises tend to be small when compared with other businesses and industrial
segments. In addition, agro-enterprises are small and compete in a relatively free market in which there are
many sellers and fewer buyers and in which the numbers and sizes of agro-enterprises do not allow
monopoly-like businesses. Furthermore, the traditional philosophy of life exhibited by many agroenterprise
workers tends to make agro-enterprises more conservative than some other businesses.
Agro-enterprise firms tend to be family-oriented. Many agro-enterprises are run by families or
deal with businesses that are run by families. Husbands and wives are often heavily involved in both the
operational and decision-making phases of the business on a full-partnership basis.
Agro-enterprise firms also tend to be community oriented. Many of them are located in small towns
and rural areas where interpersonal relationships are important and associations are long term. People
know each other and each other’s families, perhaps for several generations. Agro-enterprises, even those
that are industrial giants, are likely to be highly seasonal in nature. Because of the intimate relationship and
interdependence of agro-enterprise and farm producers, and because of the nature of planting and
harvesting seasons, special problems often arise.
Agro-enterprises have to deal with the vagaries of nature. Droughts, floods, insects and diseases
are a constant threat to most agro-enterprises. Everyone, from the banker to the chemical manufacturer, is
concerned about the weather. Lastly, many agricultural products are directly influenced by government
programmes. Therefore, numerous governmental programs and policies have direct impacts on agro-
enterprises (e.g. government regulations on prices of agricultural products).
Because of these factors, managers of agro enterprises need specialized managerial skills and
knowledge to ensure that organizational resources are used to achieve effectiveness, efficiency, and
performance.
Organizational effectiveness is the degree to which an organization achieves its stated
objectives. Efficiency is using the least cost combination of resources to achieve goals. Performance is the
organization’s ability to attain its goals by using resources in an efficient and effective way.
Managerial skills required for agricultural entrepreneurship
The unique tasks of agricultural entrepreneurship require specialized managerial skills. These
include the following:
1. Biological and technical skills: A strong understanding of biological factors inherent in
agricultural production and capability to use methods, techniques and equipment involved
in a specialized area such as plant breeding, pig production, dairy production, engineering,
maize milling and finance is required.
2. Conceptual skills: These encompass the mental ability to see the organization as a whole,
coordinate and integrate all its activities, think strategically and make long-term decisions.
3. Human skills: These involve the ability to work with and through other people, motivate,
facilitate, communicate, lead, get along with others and resolve conflicts.
4. Analytical skills: Analytical skills deal with the ability to use tools and techniques to solve
problems in a specific discipline such as marketing, materials management, logistics, and
finance.
5. Entrepreneurial skills: These refer to the ability to create new ideas and combine these
with management and organizational skills, people, informational, physical and human
resources to meet identified needs and create wealth.
 The functions of management Agro-enterprise management and agricultural entrepreneurship are
interwoven and closely linked. The implication is that a successful agricultural entrepreneur must
necessarily be a good agro-enterprise manager. In this section we introduce the main functions of
managerial work, and these are planning, organizing, leading, controlling, coordinating, and
communicating.
These functions are normally performed at the same time as the major management functions.
They are only covered as individual components of management so as to help the reader to comprehend
the various activities that need to be performed in each function when undertaking the management
function. Under this approach, execution of the different management functions is important for success of
the business or firm. It is considered by many to be the best approach or concept of management.
Planning
Involves determining the organization’s goals and outlining the means of attaining those
goals. It involves reviewing the organizational resources available and determining whether they can get
your organization to where you want it go. As a manager, you have to be sure that all the employees in the
organization are aware of the purpose and objectives of the agro-enterprise as well as the methods of
attaining them.
Planning is important in agro-enterprises for a number of reasons. First, stating goals and
plans provides a motivational force to managers and employees, as well as providing them with specific
targets to achieve. It also standardizes the performance of managers and gives them a common purpose.
Planning is essential for the business’ survival and development. In addition, planning
reduces risks and safeguards against uncertainty. It improves operational efficiency of resources and helps
management and employees get their priorities right and allocate resources to activities in order of priority.
Planning is the most basic function of management and a pre-requisite to other
management functions. For example, for you to be able to lead, control and coordinate the activities of the
organization, you have to be aware of the objectives of the business. These objectives are articulated
through the planning process.
Steps in the planning process. Several steps are involved in the planning process. They
are shown in Box 1, and they are gathering information, analyzing and diagnosing, forecasting,
establishing/ setting goals, identifying aids and barriers to planning, developing action plans for achieving
identified goals, preparing alternative plans, implementing the plan, and evaluating the plan.
 In agro-entrepreneurship, planning may be of several types. Four types of planning are
1. Financial planning,
2. Industrial relations planning,
3. Research and development planning, and
4. Physical facilities planning.
Attributes or features of a good plan. A sound plan should have the following basic
characteristics.
1. First, the objectives formulated in the plan should be within available resources and
available information.
2. Second, the plan should be flexible, i.e. it can be easily modified or suitably changed
according to prevailing situations.
3. The plan should also increase resource use efficiency and should reduce wastage.
4. Fourth, the objectives formulated in the plan should be very clear and easily
understandable.
The plan should in addition contain various alternatives of action within available
resources. A good plan should employ modern techniques in production and marketing of
agricultural products, and should stabilize the earnings of the agro-enterprise. The plan should
minimize possible risks and uncertainties, and give consideration for efficient marketing of
products. Finally, a sound plan should provide a programme for obtaining, usage and repayment of
a loan or credit.
Organizing
The process of deploying organizational resources (i.e. people, machinery, and finance) to
achieve the objectives of the agro-enterprise organization is referred to as the organizing process. You
assign personnel and other resources in the agro-enterprise towards the attainment of specific objectives.
Organizing, therefore, involves deployment of resources to specific departments, as well
as dividing labor into specific departments and deciding on the coordination mechanisms to be used in the
business organization.
The organizing process helps the agro-enterprise organization in formalizing business
procedures, structures and relationships.
Importance of organizing
Organizing is important because it helps to increase the productivity of the agro-
enterprise due to its ability to create synergistic effect. Synergy is created when an organization’s members
combine their efforts to collectively accomplish tasks that would far exceed the simple sum of their
individual efforts.
It also clarifies individual performance and specialized tasks. Duplication of work,
resources and overall effort are reduced by logically focusing efforts and resources. Good organization
establishes and clarifies channels of communication and enhances decision making, planning and control.
Finally, it helps in establishing authority, structures and accountability.
Coordination and Delegation
Coordination is the process of achieving unity of action. Where there are over two or more
interdependent individuals, groups or departments, they must work together to achieve common goals.
Collaboration becomes necessary. The collaboration across departments is referred to as coordination.
Coordination, therefore, involves designing of information processing systems and
establishment of communication channels between departments. Coordination ensures that all
departments are working towards the same organizational objectives.
Delegation. During organizing, you have also to make decisions on authority which will be
transmitted from supervisors to the subordinates and this is called ‘delegation’. Furthermore, the issue of
whom specific subordinates report to has to be outlined, as well as issues of responsibility and
accountability. Deciding on the number of people who report to each manager will give you the span of
management control.
This is a crucial process in the organizational function. If you create a structure
where supervisors have very few subordinates, this results in a narrow ‘span of control’.
Leadership
It is the process of directing and influencing other people in achieving specific tasks and
objectives. This definition has three basic assumptions.
 The first assumption is that there are other people to be led and these are willing
to be influenced. Subordinates are therefore important to the leadership process,
because without subordinates, the leadership function cannot be carried out.
 The second assumption is that there are disparities in the distribution of power
between the leader and those who are led.
 The final assumption of the definition is that leaders can influence what the
subordinates do as well as the carrying out of the tasks. The way subordinates
perform in agroenterprise organizations is therefore influenced by the type of
leaders in the organization.
The fact that some people accept someone as a leader has raised a lot of questions in
management and several theories have been developed to explain this phenomenon.
Leadership Theories The first leadership theories tried to explain why some people were
leaders whilst others were not, on the basis of personalities of individuals. These theories assumed that
managers are born and not made. They are called trait theories. Trait characteristics refer to distinguishing
characteristics that a leader can have, i.e. intelligence, values, appearance, physical, social and
personality.
The behavioural approach shifted focus from the individual to the leadership function. The
behavioural approach argues that for agro-enterprise organizations to operate efficiently, both task oriented
and group-oriented functions have to be pursued concurrently.
Task oriented functions involve problem-solving, and offering information and opinions. On
the other hand, group-oriented functions focus on social functions of making the group function smoothly,
i.e. mediation in group conflicts and facilitating discussions. These different functions result in task or
employee-oriented leadership. If you are a task-oriented manager you will focus on close supervision of
subordinates to ensure that tasks are performed satisfactorily. If you are an employee-oriented manager
you try to motivate instead of controlling subordinates.
Therefore, you will involve subordinates in the decision-making process and promote the
formation of friendly and respectful relationships in the agroenterprise organization. However, when
managers are production centered, they set rigid standards, organize tasks down to the last detail and then
prescribe specific work methods. Employee centered managers involve subordinates in goal setting and
leaders who are employee centered have more productive subordinates.
The Likert Systems Model. One of the most widely used managerial models is the
managerial grid, which identifies a wide range of employee and task oriented behaviour and these are
expressed on a continuum of 1 to 9. The managerial grid was refined by Rensis Likert and he developed
the Likert Systems 4 model to explain managerial behaviour. Descriptions of the various systems of
management in the Likert Systems 4 Model are as follows:
Systems 1: Systems 1 managers make all the decisions and order their
subordinates to carry out the tasks.
Systems 2: Systems 2 managers issue orders but allow subordinates leeway in
carrying out the tasks within carefully prescribed limits and procedures.
Systems 3: A Systems 3 manager sets goals and issues general orders after
discussing them with subordinates. Subordinates are however required to make decisions that
affect their own tasks. This type of manager motivates employees by rewarding rather than
punishing them. Subordinates are therefore free to discuss work related issues with the manager.
Systems 4: If your leadership behavior falls in the Systems 4 category, you set
goals with subordinates and work-related decisions are made by the group rather than by
individuals. Employees get both economic and psychological rewards. Your decisions as a
manager incorporate the suggestions of subordinates. The goals set and decisions reached are
 not necessarily what you prefer as a manager. Systems 4 is viewed as the ideal type of
leadership behavior.
Contingency approaches to leadership. Contingency theories are based on the
assumptions that leadership style changes as a result of the specific situation in an organization and the
experience and management style of the manager involved.
The factors that impinge on a manager’s behavior are the leader’s experience and
personality, expectations and behavior of subordinates, task requirements, organizational policies, and
behaviour of peers.
The Nature of Leadership To be able to lead, you need to have some influence
over other people. Influence refers to your ability to make other people change their behavior or way of
thinking. To influence other people, you need to have power. Power is a resource that has the potential to
influence the behaviour of other people. There are various ways you can get power in an organization. The
various bases of power are discussed below.
Legitimate power: Legitimate power is the result of the position you hold in an
organization. As a manager you get authority to direct the way people behave in the agro-enterprise.
Employees in the organization accord you respect due to your position as the ‘manager’.
Expert power: You can get expert power if you have special knowledge in an area. For
example, at a commercial farm, the driver of the tractor has power over other employees who cannot drive.
The workers who depend on the tractor to undertake their jobs will accord the tractor driver respect and
reverence due to his ability to drive a tractor. Managers within agro-enterprise organizations are expected
to have expertise which the workers do not have. In times of crisis managers are expected to use their
expert power to solve problems. Therefore, as a manager, you need to have some expert power so that
you can influence employees.
Reward power: This is the power you have due to your ability as a manager, to promote,
increase wages or salaries, praise and give formal recognition to workers in the organization. For example,
when you have the authority to nominate the worker of the month or year in your organization, you have
reward power. Workers follow your instructions so that they can be rewarded through this nomination.
Coercive power: The flip side of reward power is coercive power. When you have the
mandate to punish employees in the agro-enterprise organization you wield coercive power. When you fire,
demote, reprimand or withdraw pay or bonuses of workers with unsatisfactory performance you will be
using coercive power.
Referent power: The basis of referent power is in your personality or the way you perform
a specific task. Some managers have the personality that commands respect and admiration from workers.
Managers react differently to given situations. For example, when you find workers sitting down and not
doing their job, you may shout at the employees, reprimand them in a quiet manner or ignore them. These
three responses to a situation will illicit different responses from the employees. Some workers may have
little respect for managers who shout. To other employees a quiet reprimand could be interpreted as
weakness in a manager. You therefore need to asses’ situations as well as the workers so that you use the
techniques that illicit referent power. This is an inherent personality trait that commands respect from other
people. Referent power is very important in formal organizations.

Control
The control function involves a systematic effort to set standards and make sure that the
activities conform to the planned activities. The control process involves systematic activities that include
the setting up of performance standards, measuring and evaluating the performance.
Importance of the control process in agro-enterprise organizations. Through the control
process, managers are able to monitor events and activities in the businesses so as to ensure that plans do
not deviate from the intended path. Planning involves forecasting and an effort to predict future events. You
are probably aware that perfect prediction of events is not possible due to the dynamic nature of the agro-
enterprise environment as well as due to the limitations of planners. Causes of deviations from plans of
agro-enterprise organizations.
The business environment is dynamic and is constantly changing. As a result of these
changes plans need to be monitored and adjusted so as to attain organizational goals. There are several
reasons that can result in the plans you make for your organizations deviating and some of the major
causes of deviations are as follows.
 First, the food and agro-enterprise sector is specifically dependent on natural
phenomena which are usually beyond human influence. Climatic factors like
rainfall, floods, droughts, frost, etc. are not easily controlled by man, and this is
specifically worse in less developed countries like Zimbabwe.
 Second, the political nature of food makes planning problematic as most
governments need some control of food production and distribution, for food
security reasons. In times of crisis the government usually intervenes and gives
guidelines on how business should operate. These guidelines may not be in line
with the plans of specific agro-enterprises and may call for adjustment of plans.
 Third, managers have personal limitations and these interfere with the planning
process. Most of the developing countries do not have personnel trained in
advanced planning techniques needed in forecasting and simulation. As a result,
this has negative impacts on the accuracy of the planning process, and plans
need constant monitoring to ensure that there is no deviation.
 Fourth, the planning techniques used are frequently not accurate and usually
involve the use of historical data; this therefore implies that plans can only be
accurate if the data used in the planning process is accurate. In other words, plans
are only as accurate as the data that is used in the planning process. As a
manager in the food and agro-enterprise sector in developing countries like
Zimbabwe, it is important to seriously consider the accuracy of the data used in
the planning process. It is also important to realize the need for accurate data
gathering, recording, retrieval and storage, as this gives the basis for accurate
plans and ultimately decision-making.
 Finally, conflict between individual and organizational goals can result in deviation
from plans if managers are either ignorant of the organization’s goals or are not
committed to them. This can result in specific managers as well as divisions of the
organization working towards goals that are different from those of the business as
a whole.
Evaluation and comparison of performance. Measurement of performance involves
efforts aimed at assessing whether the organization is functioning properly and accomplishing its
goals. After measuring performance standards, managers need to evaluate actual and planned
performance. If there are differences between planned and actual performance there is need to
analyze and interpret the reasons for these differences.
To facilitate the evaluation process, feedback mechanisms should be put in place. These
feedback mechanisms can be feed-forward, on-time or feed-back systems depending on the stage at
which managers receive reports on performance.
Effective performance evaluation has to focus on the task to be done. The feedback
system has to be structured so as to identify reactions needed for specific changes in planned and
actual performance. Some deviations in performance need to be referred to managers or to technical
personnel in the business. For example, the managers in a maize milling factory with a plant capacity
of 200 bags of maize per day can ask supervisors and non-managerial workers to investigate
changes in the production if there are one or two bags less than the targeted production. Corrections
of deviations. When deviations occur, prompt action and decisions, whether technical or managerial,
need to be taken to correct deviations.
Technical action is short term action taken to solve emergencies and to deal with variances
in performance targets. Managerial actions are taken to maintain performance standards and at
times involve the development of the business strategy to solve underlying problems. Control
systems and tools.
A control system involves a planned and systematic way of ensuring that the above
outlined steps are built into the structure and activities of the organization. How do managers set up
effective control systems? For the control process to be effective there are certain important
characteristics that have to be incorporated into the system. These characteristics vary within
individual agricultural businesses. To strengthen the control process there is need to be accurate,
timely, reliable, comprehensive and economical to implement focused-on strategic points suitable for
the agro-enterprise. Information on the business performance has to be accurate because inaccurate
data results in inappropriate action being taken. Information and data within the agro-enterprise
sector is difficult and costly to collect because management information systems are
underdeveloped. For examples, farmers may not have information on prices of their produce,
transportation, haulage costs and cost of the agricultural inputs.
 Control tools are the means by which you can control operations of your agro-enterprise
and these include budgets, audits, ratio analysis, data collection and reporting forms and
responsibility centres. The areas that usually require control are finance, production process,
personnel, social and environmental impact. In addition to the managerial functions covered above,
there are complementary managerial functions that agro-enterprise managers use. These functions
are decision making, staffing, and communication.

The Decision-Making Function

As a manager you must make and implement decisions in the agro-enterprise
organizations you manage. Decision-making in organizations occurs at various levels, namely strategic,
operational and tactical levels. If the decision-making process is systematically carried out, it results in
more accurate and predictable results in the agro-enterprise organization.
Decision making is the process of systematically studying a problem, identifying and
selecting a specific course of action to solve that problem. The decision-making process is part and parcel
of all managerial activities.

Communication
Managers spend most of their time communicating with subordinates, other managers and
people from outside the organization. It is therefore important for all managers in the agro-enterprise to
learn to communicate effectively. Communication refers to the process by which people attempt to share
meaning through the transmission of messages and symbols.
Communication involves people and how they relate to each other. Through
communication you can relate to other people and share meaning through gesture, sounds, and listening.
Letters and words can only represent a portion of what is being communicated. Communication is a social
process that satisfies basic needs and desires.
Through the communication process there is a dynamic transmission of verbal and non-
verbal messages resulting in meaning shared between two or more people. Managers in agro-enterprise
organizations use communication to implement their management functions. Communication in
management is the process by which people or managers attempt to share meaning through the
transmission of symbolic messages. They use communication to influence behavior through motivating,
instructing and evaluating employees; express and clarify feelings; input or exchange information;
persuade; negotiate; change other people’s views and feelings; learn and get ideas; and amuse or impress.
All the above processes occur through the communication process. Therefore, it is
apparent that managers need to communicate effectively to be able to control, lead and organize agro-
enterprise organizations.
Communication has a direct impact on job performance and satisfaction. Through the
communication process you build relationships with employees and other managers in the organization as
well as with individuals outside the organization. You also have to provide feedback and routine information
in the agro-enterprise organization. Therefore, you need to know that the aim of communication in
organizations is to influence and effect change.
The communication processes. The communication process is a series of events or
activities. When you instruct a subordinate to carry out a task, you pass on a message on what needs to be
accomplished. Listening is part of this process. You also have to assess that the transmitted message was
received. You therefore need to receive a response to ensure that your message was received.
The communication process involves a chain of activities that are usually shown in a
communication model. Communication models differ, but the factors that are included in most models
encompass the following factors: Sender: This is the source where the idea or intention to pass a message
originates from. The sender has needs, desires, or information or a purpose for communicating to one or
more people. A manager may want to communicate with employees or other managers.
Idea: This refers to content of message to be transmitted. The idea or message can be
expressed in many ways and is influenced by the subject to be communicated, the purpose of
communicating and the personalities of the individuals involved in the communication process.
Receiver: The individual who is supposed to receive the message which is being
transmitted by the sender, is called the receiver.
 Feedback: This refers to the response or reaction of the receiver to the message that is
sent. Successful communication requires feedback. Feedback allows managers to see whether
understanding has occurred. The manager must provide the opportunity for this feedback and
involvement through a carefully designed communication process involving committees, meetings,
memos and individual contacts.
The Channel: This is the medium of transferring the message. It can be oral, written or
symbolic.
Noise: Any interference or hindrance of the communication that confuses or interferes with
the communication process is referred to as noise.
Types and methods of communication in agro-enterprise organizations. As a manager,
you have to create a conducive climate that promotes effective communication in your organization.
Communication in organizations can be verbal or non-verbal. Verbal communication includes oral and
written communication. Non-verbal communication is through dress, body language or communicating
with space.
The methods of communication mostly used in organizations are the telephone, face to
face communication or teleconferencing, memoranda, meetings and formal letters. Communication in an
organization involves internal and external communication flows.
The key to the success of any of the management functions is the free flow of information.
The agro-enterprise manager is responsible for designing and implementing the communication process.
Free flow of information means that communication must flow not only downwards (from management to
subordinates), but also upwards (from subordinates to managers) and laterally (at the same level) in order
for it to be effective. Too often managers depend almost always on downward communication and then
wonder why policies, procedures, and goals are misunderstood by subordinates.
Communication barriers. Communication barriers in organizations can fall at any stage in the
communication process. Barriers to communication can be psychological or organizational. Psychological
barriers are also referred to as micro barriers as they occur at the individual level, and macro barriers occur
at the organizational level. Organizational or macro barriers include the following.
First, different goals of departments and units within the organization lead to goal conflict.
Secondly, status relationships in the organization can be a barrier. For instance, the manager may not
effectively listen to a subordinate if he/she thinks the subordinate is too junior to contribute effectively to
the running of the business organization.
Geographic or spatial aspects can retard communication. If offices are far away from each other,
communication can be a problem if the phone or the fax machine are not functioning properly. This is a
major problem in the managing of rural based agro-enterprise organizations.
Individual or micro barriers to communication include the following;
 Conflicting assumptions between the sender and receiver can retard
communication.
 Emotions of receiver or sender at the time of communicating can distort the
meaning of the message being communicated. At times the receiver and sender
can have different interpretation of a situation and in the way, they view a specific
situation.
 Language differences are a major barrier to communication especially if the
receiver and sender do not speak or write the same language.
 Mistrust can result in perceptual or skeptical selection or acceptance of the
transmitted message.
 Lack of feedback can also hinder communication.
 Finally, a sender or receiver’s personality can have impact on the communication
process. Individuals can be inner or outer directed. Inner directed individuals do
not value or rely on the opinion of others, whilst outer directed individuals value
the opinion of others.
CHAPTER THREE: MODES OF OWNERSHIP IN AGRO-ENTERPRISE ORGANIZATIONS
Introduction
Any business, including a farm or ranch, can be organized in a number of different legal and business
formats. Many managers change the type of organization during the life of their business to better meet
changing goals and objectives. The three most common forms of business organization for farms and
ranches are (1) the sole (or individual) proprietorship; (2) partnership; and (3) corporation. Each one has
different legal and organizational characteristics and is subject to different income tax regulations. In
addition, a few farms and ranches are organized as (4) limited liability companies; (5) cooperatives; or have
(6) operating agreements with other businesses. The proper choice of organization depends on factors
such as the size of the business, the number of people involved in it, the career stage and age of primary
operators, and the owners’ desires for passing on their assets to their heirs. A final choice of business
organization should be made only after analyzing all the possible long-run effects on the business and on
the individuals involved. Sole Proprietorship Sole, simple, or single ownership refers to the ownership of
property by one person with all legal rights to dispose of the property in any way desired. In a sole
proprietorship, the owner obtains and manages the business, assumes all the risks, and receives all profits
and/ or losses. Its distinguishing characteristic is the single owner, who acquires and organizes the
necessary resources, provides the management, and is solely responsible for the success or failure of the
business, as well as servicing all business debts. A sole proprietorship is easy to form and easy to operate,
which accounts for much of its popularity. No special legal procedures, permits, or licenses are required. A
sole proprietorship is not limited in size by either the amount of inputs that can be used or the amount of
commodities produced. The business can be as large or as small as the owner desires. Additional
management may be hired, and property may even be co-owned with others. A sole proprietorship does
not necessarily need to own any assets; one can exist even when all land and machinery are leased. The
owner of a business organized as a sole proprietorship pays income taxes on any business profit at the tax
rates in individual or joint returns. Business profits and capital gains are added to any other taxable income
earned to determine the individual’s total taxable income. Advantages of a sole proprietorship. The
advantages of a sole proprietorship are its simplicity and the freedom the owner has in operating the
business. No other operator or owner needs to be consulted when a management decision is made. The
owner is free to organize and operate the business in any legal manner, and all business profits or losses
belong to the operator. A sole proprietorship is also flexible. The manager can quickly make decisions
regarding investments, purchases, sales, enterprise combinations, and input levels, based solely on his or
her best judgment. Assets can be quickly purchased or sold, money borrowed, or the business even
liquidated if necessary, although the latter may require the concurrence of a landlord or lender.
Disadvantages of a sole proprietorship. The management freedom inherent in a sole proprietorship also
implies several responsibilities. Owners of sole proprietorships are personally liable for any legal difficulties
and debts related to the business. Creditors have the legal right to attach not only the assets of the
business but also the personal assets of the owner to fulfill any unpaid financial obligations. This feature of
a sole proprietorship can be an important disadvantage for a large, heavily financed business where the
owner has substantial personal and nonfarm assets. Business failure can result in these assets being
acquired by creditors to pay the debts of the sole proprietorship. Another disadvantage is that the size of a
sole proprietorship is limited by the capital available to the single owner. If only a limited amount is
available, the business may be too small to realize many economies of size, making it difficult to compete
with larger and more efficient farms. At the other extreme, the management abilities and time of the single
owner may be insufficient for a large business, making it difficult to become an expert in any one area.
Thus, a large sole proprietorship may need to hire additional management expertise or consultants. Yet
another disadvantage of a sole proprietorship is a lack of business continuity. It is difficult to bring children
into the business on any basis other than as employees or tenants. Death of the owner also means the
business may have to be liquidated or reorganized under new ownership. This can be time consuming and
costly, resulting in a smaller inheritance and less income for the heirs during the transition period.
Joint Ventures While a sole proprietorship offers the manager maximum flexibility and independence, other
forms of business organization are possible. They allow two or more operators to combine their respective
abilities and assets to achieve levels of efficiency or other goals that might be unattainable if they were to
operate independently. Such businesses are called joint ventures. Of the several types of joint ventures,
those most common in agriculture include operating agreements, partnerships, corporations, limited liability
companies, and cooperatives. Each type of joint venture has unique characteristics related to property
ownership, distribution of income, taxation, continuity, liability, and formal organization. In many cases, only
part of the total farm business is included in the joint venture. Sometimes the joint venture affects only one
enterprise. In other cases, some assets, such as land, are excluded to protect them from the unlimited
liability of the joint venture or to make ownership shares more equal. Particular care should be taken to
distribute the income earned by a joint venture in an equitable manner. Businesses with an operating
agreement may divide gross income. In more complex businesses, owners of assets that are used but not
owned by the joint venture may be paid a fair market rental rate. People who lend money to the business
receive interest payments. People who contribute labour should be paid a fair wage, even if they are also
owners of the business. And, finally, profits earned by the business are distributed on the basis of
ownership share, patronage rate, or some other mutually agreeable criterion. The primary advantages of a
joint venture over a sole proprietorship involve combining capital and management. Pooling the capital of
the members of the joint venture allows a larger business to be formed, which can be more efficient than
two or more smaller businesses. It can also increase the amount of credit available, allowing further
increases in business size. The total supply of management and labour is also increased by pooling the
capabilities of all the members. Management efforts can be divided, with each person specializing in one
area of the business, such as crops, livestock, marketing, or accounting. It is also easier for one operator to
be absent from the business when another operator is available to stand in for them. Operating
Agreements Sometimes two or more sole proprietors conduct some farming activities jointly while
maintaining individual ownership of their own resources. Such an activity is often called an operating
agreement. Operating agreements tend to be informal, limited arrangements.
In most operating agreements, all parties pay the costs related to ownership of their own assets, such as
property taxes, insurance, maintenance, and interest on loans. Operating expenses such as the cost of
seed, fertilizer, feed, veterinarian fees, or utilities may be shared among the parties in a fixed proportion,
often in the same proportion as the fixed costs. In other cases, one party or another party may pay for all of
certain operating costs, such as fuel or feed, as a matter of convenience. In either case, the general
principle of an operating agreement is to share income in the same proportion as total resources
contributed, including both fixed assets and operating costs. Partnerships A partnership is an association of
two or more persons who share the ownership of a business to be conducted for profit. There are two main
types of partnership; the general partnership and the limited partnership. The general partnership is the
most common. Both types have the same characteristics, with one exception. The limited partnership must
have at least one general partner, but can have any number of limited partners. Limited partners cannot
participate in the management of the partnership business, and in exchange, their financial liability for
partnership debts and obligations is limited to their actual investment in the partnership. The liability of
general partners, however, can extend even to their personal assets. Limited partnerships are most often
used for businesses such as real estate development and cattle feeding, where investors want to limit their
financial liability and do not wish to be involved in management. Most farm and ranch operating
partnerships are general partnerships and henceforth our discussion of partnerships concentrates on this
type. Organization and characteristics of general partnerships. There are many possible patterns and
variations in partnership arrangements. However, the general partnership form of business organization
has three basic characteristics: 1) a sharing of business profits and losses; 2) shared control of property,
with possible shared ownership of some property; and 3) shared management of the business.
The exact sharing arrangement for each of these characteristics is flexible and should be outlined in the
partnership agreement. Oral partnership agreements, though legal, are not recommended. Important points
can be overlooked, and fading memories over time on the details of an oral agreement can create friction
between the partners. Problems can also be encountered when filing partnership income tax returns if
arrangements are not well documented. A written partnership agreement is of particular importance if the
profits will not be divided equally. The written agreement should cover at least the following points:
management, property ownership and contribution, share of profit and loss, records, taxation, termination,
and dissolution. In terms of management, state who is responsible for which management decisions and
how they will be made. Regarding property ownership and contribution, list the property that each partner
will contribute to the partnership and how it will be owned. When documenting the section on share of profit
and losses, carefully describe the method for calculating profits and losses and the share going to each
partner, particularly if there is unequal division. Records are important for the division of profits and for
maintaining an inventory of assets and their ownership. Designate who will keep what records as part of the
written partnership agreement. Also include a detailed account of the tax basis of property owned and
controlled by the partnership and copies of the partnership information tax returns. In terms of termination,
state the date that the partnership will be terminated, if one is known or can be determined. The termination
of the partnership on either a voluntary or involuntary basis requires a division of partnership assets. The
method of making this division should be described to prevent disagreements and an unfair division of the
assets. Partners may contribute land, capital, labour, management, and other assets to the partnership
account. Compensation for labour contributed or assets rented to the partnership should be paid first,
because these may not be in the same proportions as the ownership. The remaining profits generally are
divided in proportion to the ownership of the partnership, usually based on the initial value of the assets
contributed by the business. Some partners prefer to share partnership profits equally, however, regardless
of contributions. Property may be owned by the partnership, or the partners may retain ownership of their
individual property and rent it to the partnership. When the partnership owns property, any partner may sell
or dispose of any asset without the consent and permission of the other partners. This aspect of the
partnership suggests that retaining individual ownership of some assets and renting them to the partnership
may be the desirable option. A partnership can be terminated in a number of ways. If the partnership
agreement does not specify a termination date, a partnership will terminate upon the incapacitation or
death of a partner, bankruptcy, or by mutual agreement between the partners. Termination upon the death
of a partner can be prevented by placing provisions in the written agreement that allow the deceased
partner’s share to pass to the estate and hence to the legal heirs. Advantages of a partnership. A
partnership is easier and cheaper to form than a corporation. It may require more records than a sole
proprietorship, but not as many as a corporation. While each partner may lose some individual freedom in
making management decisions, a carefully written agreement can maintain most of this freedom. Another
advantage is that a partnership is a flexible form of business organization, in which many types of
arrangements can be accommodated and included in a written agreement. It fits situations such as when
parents desire to bring children and their spouses into the business. The children may contribute only
labour to the partnership initially, but the partnership agreement can be modified over time to allow for their
increasing contributions of management and capital. Disadvantages of a partnership. The unlimited liability
of each general partner is an important disadvantage of a partnership. A partner cannot be held personally
responsible for personal debts of the other partners; however each partner can be held personally and
individually responsible for any lawsuits and financial obligations arising from the operation of the
partnership. If the partnership does not have sufficient assets to cover its legal and financial obligations,
creditors can bring suit against all partners individually and collect any money due to them. In other words,
a partner’s personal assets can be claimed by a creditor to pay partnership debts. This disadvantage takes
on a special significance, considering that any partner, acting individually, can act for the partnership in
legal and financial transactions. For this reason, if for no other, it is important to know and trust your partner
and to have the procedures for making management decisions included in the partnership agreement. Too
many partners or an unstructured management system can easily create problems. Like a sole
proprietorship, a partnership has the disadvantage of poor business continuity. It can be unexpectedly
terminated by the death of one partner or a disagreement among the partners. Dissolution of any business
is generally time consuming and costly, particularly when it is caused by the death of a close friend and
partner or by a disagreement that results in bad feelings among the partners. The required sharing of
management decision making and the loss of some personal freedom in a partnership are always potential
sources of conflict between the partners. Laws governing the formation and taxation of partnerships are
less detailed than for corporations. Unfortunately, this allows many farm partnerships to operate with
minimal records and little documentation of how resources were contributed and how income has been
divided. This can make a fair dissolution of the partnership difficult. When a partnership is liquidated, the
proceeds should be distributed in the same proportion as the ownership. For this reason, it is important to
keep detailed and accurate records of the property used by a partnership, and of how wages, rent, and net
income are distributed to the partners. Corporations A corporation is a legal entity, separate and apart from
its owners, managers, and employees. This separation of the business entity from its owners distinguishes
a corporation from the other forms of business organization. As a separate business entity, a corporation
can own property, borrow money, enter into contracts, sue, and be sued. It has most of the basic legal
rights and duties of an individual. Three groups of individuals are involved in a farming corporation:
shareholders, directors, and officers. The shareholders own the corporation. As owners, the shareholders
have the right to direct the affairs of the corporation, done through the elected directors at annual meetings.
Each shareholder has one vote for each share of voting stock owned. Therefore, any shareholder with 51
percent or more of the outstanding voting stock has majority control over the business affairs of the
corporation. The directors are elected by the shareholders at each annual meeting, and they hold office for
the following year. They are responsible to the shareholders for the management of the business. The
number of directors is normally fixed by the articles of association/ incorporation. Meetings of the directors
are held to conduct the business affairs of the corporation and to set broad management policy to be
carried out by the officers. The officers of a corporation are elected by the board of directors and may be
removed by them. They are responsible for the day-to-day operation of the business within the guidelines
established by the board. The officers’ authority flow from the board of directors, to whom they are
ultimately responsible. A corporation chairman or president may sign certain contracts, borrow money, and
perform other duties without board approval; however, they will normally need board approval before
committing the corporation to large financial transactions or performing certain other crucial activities. In
many small family farm corporations, the shareholders, directors, and officers are all the same individuals.
To an outsider, the business may appear to be operated like a sole proprietorship or partnership. Even the
directors’ meetings may be held informally around a kitchen table, but a set of minutes must be kept for
each official meeting. Advantages of a corporation. Corporations provide limited liability for all the
shareholders/ owners. They are legally responsible only to the extent of the capital invested in the
corporation. Personal assets of the shareholders cannot be attached by creditors to meet the financial
obligations of the corporation. This advantage may be negated if a corporation officer is personally required
to co-sign a note for corporation borrowing. In this case, the officer can be personally responsible for the
debt if the corporation cannot meet its financial obligations. A corporation, like a partnership, provides a
means for several individuals to pool their resources and management. The resulting business, with a
larger size and the possibility of specialized management, can provide greater efficiency than two or more
smaller businesses. Credit may also be easier to obtain because of the business continuity advantage of a
corporation. The business is not terminated by the death of a shareholder, because the shares simply pass
to the heirs and the business continues. However, a plan for management continuity should exist by having
more than one person involved in the management and capable of taking over responsibility. A corporation
provides a convenient way to divide and transfer business ownership. Shares of stock can easily be
purchased, sold, or given as gifts without transferring title to specific parcels of land or other assets.
Transferring shares does not disrupt or reduce the size of the business and it is a convenient way for a
retiring farmer to gradually transfer part of an ongoing business to the next generation. There can also be
income tax advantages to incorporation, depending on the size of the business, how it is organized, and the
income level of shareholders. Disadvantages of a corporation. Corporations are costly to form and maintain
than sole proprietorships and partnerships. Certain legal fees are necessary when organizing a corporation,
and legal advice will be needed on a continuing basis to ensure compliance with state regulations. An
accountant may also be needed during the formative stages and throughout the life of the corporation to
handle financial records and tax-related matters. Doing business as a corporation requires that
shareholders and directors meetings are held, minutes are kept of directors meetings, and annual reports
are filed with the state. However, if forming a corporation results in better business and financial records
being kept, this might be viewed as an advantage rather than a disadvantage, because better information
for making management decisions will be available.
Limited Liability Companies A limited liability company is a relatively new type of business organization in
the farming sector that closely resembles a partnership, but offers its members the advantage of limited
liability. This means that creditors or other claimants can pursue the assets of the limited liability company
to satisfy debts and other obligations; but cannot pursue personal or business assets owned individually by
members of the limited liability company. This is a significant advantage to potential investors. Limited
liability companies can include any number of members, all of whom can participate in management.
Ownership is distributed according to the fair market value of assets contributed, as in a partnership.
Likewise, net farm income from a limited liability company is passed to the individual tax returns of the
members in proportion to their shares of ownership. Unlike a corporation, the limited liability company
cannot deduct the cost of fringe benefits, such as insurance plans or use of vehicles provided to employees
who are members of the limited liability company, from the amount which is taxable.
Cooperatives Farmers worldwide have used cooperatives for many years as a means of obtaining inputs
and services or for marketing products jointly. In some countries, cooperatives for the purpose of farm
production have been formed by groups of small scale landholders or farm workers to gain efficiencies in
production. Cooperatives are a special type of corporation. They require articles, by-laws, and detailed
records. Members who contribute capital enjoy limited liability on those contributions. Net income is passed
onto members before it is subject to income tax. Cooperatives can also provide tax-deductible benefits to
owner members. Control of a cooperative differs from other forms of business organization, in that all
members have one vote each when it comes to making decisions, regardless of how much of the
cooperative they own. Most agricultural cooperatives limit membership to active members only. In recent
years, a new form of farmer cooperative, known as a “closed” or “new generation” cooperative has become
popular. Members must contribute a significant amount of equity capital to join and agree to sell a certain
volume of production to the cooperative on a fixed schedule. Memberships can be bought or sold. These
new cooperatives have been formed mostly for value-added processing, but also include livestock finishing
and egg-laying operations. Perhaps the key factor in making a farming cooperative successful is a true
desire to cooperate. Each member must perceive that working together will help obtain benefits that
outweigh the necessity of giving up some degree of managerial independence.

CHAPTER FOUR: SOURCES OF CAPITAL FOR AGRO-ENTERPRISES

Introduction
Broadly defined, capital is the money invested in the physical inputs used in agricultural production. It is
needed to purchase or rent productive assets, pay for labour and other inputs, and finance family living and
other personal expenditures. Any decision to expand or reorganize the farm business must involve an
evaluation of the alternative means of obtaining the capital resources. A farm operation requires two types
of capital: investment capital and operating capital. Investment capital includes such items as machinery,
equipment, land and other durable inputs, whereas operating capital includes seed, chemicals, fertilizer,
feed, and other inventories and supplies. The funds required to finance the investment and operating
capital requirements can come from either or both of two sources: internal sources and external sources.
Sources of Funds for Agro-enterprises Capital consists of cash and assets purchased with cash, so it is
relatively easy to inter-mingle capital from different sources. An important part of farm financial
management is the ability to obtain capital from several sources and combine it in the proper proportions in
various uses. The main sources of finance for agro-enterprises are: (a) internal sources; and (b) external
sources. Internal sources The main source of internal finance is the farmer’s own capital, called owner
equity or net worth. It is calculated as the difference between the total assets and the total liabilities of the
business. There are several ways in which the operator can secure or accumulate equity. Most farmers
begin with a contribution of original capital acquired through savings, gifts, or inheritances. The most
important source of equity funds is savings. Savings is the amount of income that is not consumed and is
thus available for reinvestment in the farm business. Thus, savings can be calculated as net farm income
plus nonfarm income minus living expenses and income taxes. The volume of savings can be increased
not only by increasing farm income, but also by reducing family expenditures. In fact, in many farm
businesses, the primary method of increasing equity capital accumulation is through reduced consumption,
particularly for young families. Another method of increasing equity capital accumulation through savings is
for husband or wife to obtain off-farm employment to increase the injection of nonfarm income. Savings
provide more than just equity funds which can be used to purchase assets. Savings indicate an ability to
handle one’s finances, which will have an impact on the amount of credit or debt that can be obtained. It
also indicates a willingness to forgo current consumption for the benefit of a higher level of income and
standard of living in the future. Historically, farmers have had a higher savings rate than most people.
Analysts have estimated that farmers save almost one-third of their income; in other words, approximately
one-third of their disposable income is reinvested in their farming operation.
Much of the savings might be described as “forced savings.” Forced savings occur because the farmer
does not purchase machinery and equipment with cash, but instead typically makes a 20 to 30 percent
cash down-payment and acquires the remainder of the funds from credit sources. Payments on debt take
priority over unnecessary consumption, and since the repayment schedule on most items is shorter than
the depreciable life, the farmer accumulates capital in making loan payments. Thus, the farm family is
forced to reduce consumption and save so as to make payments on debt obligations. Another source of
equity funds for the farm business is that of the investor whether he or she be a doctor, lawyer, farmer, or
any other professional. Combining resources with an investor may not directly increase the equity funds of
the farm operator, but it does increase the capital base and the size of the business available to manage.
This increased size of operation may result in increased efficiency because of economies of size, and thus
increase the incomegenerating capacity of the business and the accumulation of equity over time through
increased savings. Thus, the benefits to the farm operator of using someone else’s equity funds are
primarily those of economies of size and future equity accumulation. In addition, the investor may be the
only source of additional equity funds for the beginning farmers who have no family members with sufficient
resources to assist them in obtaining the “critical mass” of capital necessary to begin farming. The investor
also may play an important role in providing capital to agriculture through the rental market. The
contribution occurs through the rental of real estate to operators who may not have adequate resources to
purchase a similar tract of land. One of the disadvantages of the investor as a source of equity funds is that
he or she will typically want to exercise some control over the use of funds and the management of the
business. A farmer who acquires an investor as a partner must, therefore be willing to give up some
independence and freedom to make investment and operating decisions. Depending on the business
arrangement developed, the operator may also have a “partner” to share in the liability and losses that can
occur. The advantages of internal financing are that no interest payments have to be met; no repayment is
necessary; and no costs are involved. For example in the issue of shares there is the cost of managers’
time locating sources of funds, a situation which does not hold in the case of internal financing. External
sources The main types of external sources of finance are classified into: (i) short term funds sources (up to
one year, used to finance working capital); (ii) medium term fund sources (one to five years, used to finance
additional working capital and provide bridging finance until long term sources of finance can be found);
and (iii) long term fund sources (over five years, used for the acquisition of fixed assets). Sources of short-
term funds These sources include trade credit; secured loans; unsecured loans; commercial paper; and
pledging accounts receivable. Trade credit is the granting of credit by one firm to another firm. Trade credit
can take several forms, the most common of which are open book credit, promissory notes, and trade draft.
Open-book credit is a form of trade credit in which sellers ship merchandise on a “gentlemen’s agreement”
that payment will be forthcoming. Promissory notes is a form of credit in which buyers sign promise-to-pay
agreements stating when and how much money will be paid to the seller before the merchandise is
shipped. Trade draft is a form of credit in which buyers must sign statements of payment terms attached to
the merchandise by sellers. Once the buyer signs the statement, the document becomes a trade
acceptance. These are used especially in international transactions. Short-term loans are generally used to
purchase inputs needed to operate through the current production cycle. Purchases of fertilizer, seed, and
livestock feed are examples. Wages and rents are also financed with short-term credit. Repayment is due
when the crops are harvested or when the livestock are sold. Short term loans are also called production or
operating loans and are listed under current liabilities on the balance sheet. The security for a loan refers to
the assets pledged to the lender to ensure loan repayment. If the borrower is unable to make the necessary
principal and interest payments on the loan, the lender has the legal right to take possession of the
mortgaged assets. These assets can be sold by the lender and the proceeds used to pay off the loan.
Assets pledged or mortgaged as security are called loan collateral. Thus collateral is an asset in the form of
inventories, accounts receivable, marketable securities, land, buildings and equipment pledged by
borrowers that may be seized by lenders in case of non-payment. With secured loans, some asset is
pledged to provide collateral for the loan. Lenders obviously favour secured loans, because they have
greater assurance that the loans will be repaid. A secured short term loan is a bank loan in which the
borrower promises to repay the loan plus interest, and provides collateral. A borrower with a good credit
history of prompt loan repayment may be able to borrow some money with a “promise to repay” or without
pledging any specific collateral. This would be an unsecured loan, also called a signature loan, since the
borrower’s signature is the only security provided to the lender. An unsecured short term loan is a loan for
which collateral is not required but the bank requires a compensating balance, i.e. a portion of the loan
amount is kept on deposit with the bank in a non-interest-bearing account. These take the form of lines of
credit; revolving agreements; or commercial paper. A line of credit is a standing arrangement between a
bank and an agro-enterprise in which the bank agrees to lend the firm a maximum amount of funds on
request. A revolving credit agreement is an arrangement in which a lender agrees to make funds available
on a continual basis. A commercial paper is a short-term security or note containing the borrower’s promise
to pay, used by firms to raise short-term funds. Corporations issue commercial paper with a certain face
value. Buying companies like insurance companies with available cash pay less than that value. At the end
of a specified period of say, 30 or 90 days, the issuing company buys back the paper at face value. The
difference between the price paid and the face value is the buyer’s profit. For the issuing company, the cost
is usually lower than prevailing interest rates on short-term loans. Pledging accounts receivable involves
using accounts receivable (money due from a firm’s customers) as collateral for loans. If there is
nonpayment, the lender may seize accounts receivable, that is, money owed to the borrower by its
customers. Sources of medium-term funds The sources of medium-term funds to finance additional working
capital, provide bridging finance, and acquire fixed assets, are medium term loans, export credits, hire
purchase, and leasing. When a loan is repayable over more than one year but less than 5 years, it is
classified as a medium or intermediate term loan. One or more payments are usually due each year under
this type of loan. Intermediate term loans are often used for the purchase of machinery, breeding and dairy
livestock, and some buildings. These assets will be used in production for several years and cannot be
expected to pay for themselves in one year or less. Export credits are another source of medium term
funds. Some foreign suppliers grant credit terms for purchase of capital equipment through assistance from
their governments. For example, a Zimbabwean company purchasing capital equipment from Britain may
be assisted by the British Export Credit Guarantee Department. The British Export Guarantee department
pays the supplier in full and makes it possible for the Zimbabwean company to receive medium-term credit.
Hire purchase is hiring and buying vehicles and equipment on credit. This is an expensive form of financing
with effective interest rates above the prime rate. Leasing is arranging for the use and not ownership of
fixed assets in return for a periodic lease payment. Sources of long-term funds The two most common
sources of long term funds to finance expenditures on fixed assets are debt financing from external sources
and equity financing from internal sources. Debt financing is long-term borrowing from sources outside the
company. The two major sources of these are long-term loans; and sale of corporate bonds and
debentures. Long-term loans are available from commercial banks, credit companies, insurance
companies, and pension funds with which the business has a long-standing relationship. A loan with a term
of 5 years or longer is classified as a long-term loan. Assets with a long and indefinite life, such as land and
buildings, are often purchased with funds from long-term loans. Loans for the purchase of land may be
made for as long as 20 to 40 years, for example. Annual or semiannual payments normally are required
throughout the term of the loans. A corporate bond is a contract in which the issuer promises to pay holders
of the bond a certain amount of money at a specified date, e.g. 30 years. A debenture is a document or
certificate that the borrowing company issues, acknowledging indebtedness of a stated amount of money
and specifying the rate of interest and repayment dates and conditions of repayment. Equity financing
involves issuing common stock (selling shares in a company), or retaining the firm’s earnings to raise
capital. A company can obtain funds for buying land, buildings and equipment by issuing shares or
common stock either to a selected number of individuals (in the case of a private company), or to members
of the public (in the case of a public company). Persons who obtain shares are either neutral persons or
legal bodies, and become shareholders or members of the company. Persons who purchase common
stock seek profits in two forms, namely dividends and appreciation. Shareholders hope for an increase in
the market value of their stock from the company earning profits and growth. Retained earnings are profits
retained for the firm’s use rather than paid out as dividends. If a company uses retained earnings as capital,
it will not have to borrow money and pay interest on the borrowed money. But retained earnings mean
smaller dividends for shareholders and may decrease the demand for, and the price of the company’s
stock. Venture capital is another form of long term finance. Venture capital involves obtaining access to
outside equity funding from venture capital firms that seed or invest in new firms with rapid growth potential
in return for part of ownership of the borrowing firm. Establishing and developing credit When trying to
establish or develop credit, it is useful to look at it from the lender’s point of view. A useful technique is to
try to provide answers to the following questions: What does a lender consider when making a decision on
a loan application? Why can one business borrow more money than another or receive different interest
rates and repayment terms? A borrower should be aware of the need to demonstrate and communicate
creditworthiness to lenders. Factors affecting creditworthiness of a borrower Some of the more important
factors that go into making loan decisions (i.e. deciding on whether or not to award a loan to a prospective
borrower, the conditions for borrowing and terms of repayment) include personal character of the loan
applicant; management ability; financial position and progress over time; repayment capacity; purpose of
the loan; and collateral. When using these factors as a guide for establishing and developing credit, a
prospective borrower should remember that lenders want to make loans; that is their business. However,
they are looking for profitable and safe loans that will be repaid, and will do as much as they can to ensure
profitability and safety for their loans.
Personal character. Honesty, integrity, judgment, reputation, and other personal characteristics of the loan
applicant are always considered by lenders. Credit can be quickly lost by being untruthful in business
dealings and being slow to meet financial obligations. If the lender is not acquainted with the borrower,
character references usually will be requested and checked. To maintain a good credit record, borrowers
should promptly inform lenders of any changes in their financial position for farming operation that might
affect loan repayment. An honest and open relationship with lenders is necessary to maintain
creditworthiness. Management ability. A lender must try to evaluate a borrower’s management ability.
Established farmers and ranchers will be evaluated on their past records, but beginners can only be judged
against their background, education, and training. These factors affect profitability and therefore the ability
to repay a loan. Lenders often rate poor management ability as the number one reason for borrowers
getting into financial difficulty. Financial position. Accurate, well-prepared balance sheets and income
statements are needed to document the current financial position of the business and its profitability.
Lenders can learn much about the business from these records. A track record of good financial progress
over time can be just as important as the current financial position. Repayment capacity. Having a
profitable business does not guarantee repayment capacity. There must be enough cash income to meet
family living expenses and income tax payments, as well as the interest and principal payments on loans.
Repayment capacity is best measured by the cash flow generated by the business. A cash flow budget
projected for one or more years should be prepared and completed before borrowing large amounts and
establishing rigid repayment schedules. Too often, money is borrowed for a profitable business, only to find
that cash flow in the early years is not sufficient to make interest and principal payments. A longer loan
term or a more flexible repayment schedule may solve the problem if it is identified on time. Purpose of the
loan. Self-liquidating loans may be easier to obtain. Self-liquidating loans are for items such as fertilizer,
seed, feed and agricultural chemicals where the loan can be repaid from the sale of crops or livestock. On
the other hand, capital asset loans are those used to purchase long-term tangible assets such as land or
machinery, which must generate additional revenue without being sold themselves. Capital asset loans
may require extra collateral. Collateral. Land, buildings, livestock, machinery, stored grain, and crops in the
field can all be used as loan collateral. The amount and type of collateral available are important factors in
a loan request. Loans should not be made or requested unless repayment can be projected from farm
income. However, lenders still ask for collateral to support a loan application. If the unexpected happens
and the loan is in default, it may be the lender’s only means of recovering the loan funds. In some cases a
lender may ask for personal assets to be pledged as collateral for a business loan or require another
operator to co-sign a note.