Practical Manual - K. K. Wagh
Transcript of Practical Manual - K. K. Wagh
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 1
K. K. Wagh Education Society’s
K. K. Wagh College of Agriculture Business Management,
Saraswati Nagar, Mumbai Agra Road, Panchavati,
Nashik.
Affiliated to Mahatma Phule Krishi Vidyapeeth, Rahuri
Practical Manual
Of
Course No. – ABM-111
Course Title- Principles of Management and Agribusiness
Credits – 2 (1+1)
2017 - 2018
Name of the Student: __________________________________________________
Registration No: ______________________________________________________
Class: __________________________ Semester: ____________________________
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 2
Certificate
This is to certify that Mr. /Miss ___________________________
Registration No. ________________________ has successfully
completed all the practicals of the course no. ABM-111 (Principles of
Management and Agribusiness) during the Ist Semester of Academic Year
2017-18.
Place: Nashik
Date: Course Teacher
Prof. V. S. Dange
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 3
Index
Exercise
No. Title
Page
No Date Remark
1 Study of various business models
in agri-business.
2 Study of farm records.
3 Study of farm inventory.
4 Study of systems of book keeping.
5 Study of farm accountancy.
6 Study of measures of farm
income.
7 Study of measures of farm
efficiency.
8 Study of farm planning
techniques & situations.
9 Study of farm budgeting
techniques & types.
10 Study of problems of partial
budgeting.
11 Study of cost ratios & capital
ratio.
12 Study of balance sheet & financial
ratio analysis.
13 Study of farm income statement
14 Study of methods of valuation of
farm inventory.
15 Study of farm adjustment
programme under uncertainty.
16 Study of preparation of cash flow
plan.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 4
Exercise No:-1 Date:-
Title:-Study of various business models in agri-business.
What is a business model?
A business model is the way by which a business creates and captures value within a market
network of producers, suppliers and consumers, or, in short, "what a company does and how
it makes money from doing it".
The business model concept is linked to business strategy (the process of business model
design) and business operations (the implementation of a company's business model into
organizational structures and systems).
Emerging Areas of Agribusiness
A) Agribusiness Opportunities
(i) Production
• Production of high-yielding seeds.
• Production of high-quality planting material, including use of tissue culture methods
of micro-propagation.
• Nurseries, including hardening nurseries.
• Organic farming.
• Production of microbial cultures and vermicompost.
• Floriculture.
(ii) Processing
• Fruit and vegetable processing, including dehydration, canning, aseptic packaging,
processing of underutilized fruits, and processing for other products like grape raisin,
osmo air-dried fruits, fruit toffee, bleached dry ginger and spices’ powders.
• Processing of maize for starch and feed through improved mini/small mills and dry
milling plants.
• Processing of millets for various purposes, including malt from finger millets and
RTE (Ready-to-Eat) products.
• Processing of sugarcane for various jaggery products like spiced jaggery, powdered
jaggery, and jaggery cubes.
• Processing of herbal and medicinal plants.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 5
• Processing of dairy products.
• Processing for poultry products, including poultry dressing, and
• Processing of livestock products and livestock wastes.
(iii) Infrastructure
• Cool chain infrastructure, including cold stores.
• Storage and warehousing.
• Specialized transport services.
• Packaging infrastructure, including pack houses, and
• Agri-clinics and service centres.
(iv) Trade and Others
• Procurement through contract arrangements, including contract farming.
• Retailing.
• Supply chain management, and
• Capacity building, including human resource development in agribusiness.
B) India’s Retail Sector
• One-third are food retail outlets and two-thirds are non-food outlets.
• Organized retailing constitutes only 2 per cent of the total retail sales but is expected
to go above 10 per cent.
• Organized retailing takes place under different formats. Globally, there are six retail
chain formats, viz. hyper markets, super markets, super centres, warehouse clubs,
discount stores, convenience stores and pop and mom stores. In India, 14 companies
run departmental stores and several others are regularly entering the retail segment in
different formats. It is reported that there are at least 24 hyper markets, 358 super
markets, 240 convenience stores, and 464 discount stores. Organized sector players
are also doing assembling, storage and sales to other retailers. Some Indian super
markets are ‘Food World’, ‘Nilgiris’, ‘Subhiksha’, ‘Fab Mall’, ‘Giant’, etc. Super
markets consider fruits and vegetables as destination category of goods to attract more
customers. Some other agricultural retail chains are: ‘E-Choupals’ and ‘E-Sagars’
(ITC), ‘Krishi Vihars’ (M&M), ‘Aadhaars’ (Godrej Agro), ‘Kisan Sansars’ (Tata) and
‘Reliance Fresh/ Reliance Retail’.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 6
C) Contract Farming
• The organized sector is using contract farming model for meeting its requirements for
retailing, processing or export purposes. Despite several advantages of contract
farming, the coverage continues to be limited.
• Contract farming has been traditionally a common practice for the paper industry,
match stick manufacturers, and now in seed production. Contract farming lowers
transaction cost for the company and reduces market risks for the farmer and
increases their income. It is certainly a viable alternative to corporate farming. Some
sort of contract farming is also prevalent in sugarcane and dairying, but it is not
treated as a formal format of contract farming.
Exercise for students
Study and write a detailed report on any one agribusiness unit. Following points may be
included:
Type of industry.
Source of finance.
Human Resource required.
Raw materials required.
Processing activities undertaken.
Finished products.
Marketing.
Problems.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 7
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 8
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 9
Exercise No:-2 Date:-
Title:-Study of Farm Records.
It is always said that Indian cultivator is good Producer rather than good business man. He
knows how to produce but he does not know how to keep accounts of the farm. It is therefore
very necessary to have sufficient knowledge about farm accountancy in order to handle the
farm business efficiently.
Farm record is an account of the various activities carried out on the farm on a regular
basis. Such activities include farm purchases, utilization of farm inputs, number of livestock
kept and equipment procured. It also includes crop cultivated, seed planted, cultural activities
carried out, quantity harvested, etc.
There are three types of Farm Records
1. Physical Farm Records
2. Financial Farm Records
3. Supplementary Farm Records
1. Physical Farm Records
These records are related to the physical aspects of farm business operation .they do not
indicate financial position or the outcome of farm business, but they simply record the
physical efficiency or performance of the farm.
Physical farm records normally include the following records
1) Farm map, soil map and contour map
2) Charts on physical efficiency
3) Land utilization records
4) Crop production and disposal records
5) Livestock production and disposal records
6) Labour records and daily work dairy
7) Machinery use records
8) Feed records
9) Stock or store records
10) Poultry records
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1) Farm Map
It is one of the most simple and brief records of farm features it gives the visual impression or
a birds I view of the whole location of farm business .it indicates relief features of the farm at
a glance .personal observation is very necessary and farm map is just supplementary to the
physical spot observation.
e. g. Farmers’ farm house, cattle shed approach road etc are included in the farm map
2) Production Records
The importance of the production record cannot be over emphasizing production records
provided standards of the performance in the use of resources. They help to have plant base
on facts of actual performance instead of guesses. The form and time of physical records
relating to crops or livestock will depend upon the degree of specialization and the type of
farming being followed.
3) Land Utilization Records
It shows total crop area having irrigation facilities area under farm building, area under
garden, and horticultural plantation etc.
e.g. Name of the farm: Sadashiv Joshi’s farm
Sr.
No. Land use
Year
2012 2013 2014 2015 2016
1 Cultivated land
Irrigated 2 3 4
Un irrigated 2 1 1
2 Buildings and roads 0.5 0.5 1.5
3 Garden 0.5 0.5 0.5
Total 5 5 7
4) Cropping Pattern of Farm
It shows record of various crops cultivated in Rabbi, Kharif and summer season.
Name of the farm: Sadashiv Joshi’s farm
Sr.
No. Crops
Year
2014 2015 2016
1 Kharif
Jowar 2 1 1
Bajra 2 3 3
2 Rabi
Wheat 3 3.5 4
Gram 1 1 0
3 Summer
Groundnut 2 1.5 2
4 Annual/Biannual 2 2.5 1
5 Perennials 3 2.5 4
Total 15 15 15
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 11
5) Labour Records
It can be of two categories they are
A) Simple labour record for selected enterprises or operations
B) Complete labour record for farm
A) Simple labour record:-
It may often be useful to keep a record of the labour used for one or more
enterprises where there is some special reason to study efficiency for seasonal requirement of
labour. To obtain a seasonal distribution of labour on the enterprises it is necessary to make
subtotal by once or a week
B) Complete labour record
Sometime distribution of labour on the entire farm is require to be studied to obtain
complete record the amount of time at each work on the farm spend is recorded to find out
how efficiently each of the principle operation such as ploughing, harrowing, harvesting etc
was performed .the record must specify not only the enterprise but also the size of the
machines and implements
Labour Record
Crop: ______ Plot: _____ Area: ______ Season: ______ Year: ______
Operations Date Hours
Date Hours
Man Tractor Man Tractor
1.Ploughing
2.Leveling
3.Seed bed
preparation
4.Sowing
5.Intercultivation
6.Weeding
7.Spraying
8.Irrigation
9.Harvesting
10.Threshing
6) Machinery Use Records (LOG book)
Use of machines on different farm organization constitutes a heavy cost which needs to be
curtailed economically. To have full control over machines use and study the performance of
different machines there is need to maintain proper machinery use records.
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Name of Farm Machinery: ______Size:____ Make: ______ Date of Purchase: _____
Date
Nature
of
work
done
Period used
hours
Distance
covered/
Area
covered
Fuel /Oil consumed (Litres) Electricity
consumed Repairs
From To Previous Purchased Total Consumed Balance
7) Stock and Store Registers
For watching the stock of store position at a particular time of different articles use at the
farm there is need to maintain the stock or store register for each individual farm inputs it
shows maintenance of proper record of each individuals farm business input and output and
also record payment made for purchase of input like seed, fertilizer.etc
Sr.
No Date
Opening
balance
(Qtl)
Receipt Total Issued Balance
From
whom
received/
to who
issued
Cost
(Rs.)
Bill
No.
Dated
Rema
rks
8) Feed Records
These records can be maintained on the specialized livestock farms.
Eg. Dairy, sheep rearing and poultry. The feed re4cord maintain separate livestock unit being
feed on separate ration. The purpose of these records is to determine the field efficiency .it
show what actually and quantity of feed are used for enterprise for all animals. They can also
show how outcome of them per unit of feed. They can indicate profit per bird/animals and
these records can be help for further Improved feeding method.
Feed Record (Feed in Kg.) Month:-
Date Cows (Nos.) Buffaloes (Nos.) Other (Nos.)
Straw Green
fodder Concentrate Straw
Green
fodder Concentrate Straw
Green
fodder Concentrate
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2. Farm Financial Records
The records which are mainly related to the financial aspects of the operation of a farm
business are called as farm financial records. These records are of the following types:
1) Farm inventory
2 Farm cash accounts or farm financial accounts
3 Classified farm Cash accounts
I) Farm inventory
It is the list of all physical property of a business along with their values at a specified date .it
is the complete list of farmer’s assets it is the first step in farm accounting
Farm Inventory of Farm X on 1st April to 31st March
Items Beginning of the year
(01-04-2016)
End of the year
(31-03-2017)
Quantity(Kg.) Value(Rs.) Quantity(Kg.) Value(Rs.)
I) Non depreciable
Assets
a) Land
i) Dry land
ii) Irrigated land
b) Food grains
c)Suppliers
i)Seeds
ii)Fertilizers
d)Marketable livestock
e)Others
II) Depreciable Assets
i)Tractor
ii)Tube well
iii)Farm building
iv)Live stock (Buffaloes,
cows etc.
III) Cash Assets
a)Cash in Hand
II) Farm cash accounts
These record related to the annual operation of the business and the profit and losses
associated with it where as the farm inventory is a record of the financial condition at a
particular time .the farm cash account record of the results of the operation of whole farm
over period of time .farm financial accounts can be simple as just keeping a statement of the
expenses and receipts.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 14
Type of farm cash accounts
1. Farm diary
Diary is meant for daily recording of all important events on the farm. it may include weather
reports of the day as well as cash receipts and expenses from all resources .
2. Farm business cash records
It is the record of all cash receipts from and all cash expenses incurred on the farm business.
The farm business cash records all personal cash expenses and all nonfarm cash income.
3. Personal cash record
It is strictly as record of all personal expenses of the farm family excluding all the farm cost
and usually a recording of the cash income from all sources.
4. Complete cash record
It include expenses on all items both personal and business income from all sources recorded
according to types of sources
Maintenance of farm cash records
Many kinds of farm cash accounts can be used. Unfortunately the farm accounting problems
vary from farm to farm and no farm record book can be developed that will exactly meet the
needs of farmers.
III) Classified farm cash accounts
The classified cash records is a modified and more complicated form of the simple cash
records meant to provide detail facts about the farm business that can be obtain from cash
records it provides details of the cost on and returns from the different farm enterprises as
well as general summery.
Limitations of the farm cash accounts:
1) The cash account does not provide facts about gain or loss.
2) The cash accounts does not provide any major or real profit for the farm as a whole for
any specific year for a given period of time
3) Transactions in cash accounts are restricted to those of the cash holding.
Use of farm financial or cash accounts:
1) Check on cash availability at any time. The farm cash accounts provide a basis for
check the total cash in the bank at any time.
2) Provides receipts and expenses information for quick farm adjustment .the farm
cash accounts provides a complete record of expenses and receipts, frequent check
on receipt compare with expenses with saved time and money
3) Provide information on cost and return of different enterprises. the summaries cash
accounts provides the information of cost and returns of the business at any time.
4) Provides the basis for a simple study and analysis of farm business
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 15
3. Supplementary Records
A) Capital asset sale register
B) Cash sale register
C) Credit sale or purchase register
D) Wage register
E) Funds borrowed , payment register
F) Farm expenses(paid in kind ) register
G) Nonfarm income record
Advantages of Farm Records and Accounts
The various advantages of keeping systematic farm records can be described as under:
1. Means to higher income
To obtain higher income, farmers must have exact knowledge about present and potential
gross income and operating costs. The best way to obtain information on present results is to
keep records and accounts, in order to:
i) know the financial status at a point of time,
ii) know gains and losses over time,
iii) know the better sources of income and items of cost,
iv) keep a check on unproductive expenditure,
v) examine comparative profitability and costs involved for different enterprises,
vi) locate weak points in the farm organization,
vii) compare farm efficiency farming in comparable situations, and
viii) develop rational short-term and long-term production plans.
2. Basis for diagnosis and planning
Diagnosis of management problems is the pre-requisite of sound planning .records and
accounts provide the basic information needed for such a diagnosis.
3. Way to improve managerial ability of farmer
It helps to acquire business habits which can be of help in taking advantage of changes in the
economic environment. The farmer gets a better insight into the working of his business,
which helps him in finding out the defects which can be set right by exercising better control
and effecting economies. The farmer can avoid mistakes and losses which would otherwise
result due to dependence only on his memory for guidance.
4. Basis for credit acquisition and management
Properly kept records and accounts can demonstrate and authenticate the production and
income potentials and credit worthiness of the farmer. Thus lending agencies can help the
farmer in meeting his credit more readily and he can manage his credit utilization properly.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 16
5. Guide to better home management
Records and accounts provide information on farm-household economy. This is particularly
important in India where farm and home management are so closely integrated. Analysis of
farm records provides good guides for the allocation of resources between production
improvement and immediate family welfare.
6. Basis of conducting research
Research requires precise and correct data which is possible only if proper records and
accounts are maintained on the farms included in the study.
7. Basis for Government policies
The farmers need to continuously feed the facts for state and national farm policies such land
policies, price policies, and crop insurance, etc. Records and accounts are helpful in obtaining
the correct data for examining and developing such policies to be sound.
Problems and Difficulties in Farm Accounting
1. Subsistence nature of farming
Farming as a business is, relatively speaking, a small size operation in India. Farmers cannot
engage separately trained accountants for helping them in farm accounting. Subsistence
nature of farming does not produce any incentive for keeping the records.
2. Farming is laborious business
Farming requires a lot physical labour, In addition to mental work of management. In the
daily routine, the farmer usually gets exhausted in the evening and does not feel like sitting at
the desk to complete records and accounts.
3. Triple role of Indian farmer
Indian farmer plays a triple role in running his business, i.e. that of a manager, a financier
and a labourer.
He needs, therefore to know his wages as a labourer, his returns to capital and his returns
to his management role. Complex types of records which would give such information are
difficult to maintain.
4. Illiteracy and lack of business awareness
The very low level of literacy among the Indian farmers is a hindrance in developing the
required level of business awareness on the part of the cultivators and they do not, therefore,
realize the need for records and accounts.
5. Complicated nature of the Agriculture business
It is a biological industry and is always subject to weather and other natural uncertainties. It
requires accounting systems which can handle various complexities involved in the business
of farming. Such complicated accounts are difficult to maintain
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 17
6. Inadequate extension service
Sufficient number of trained specialists in farm management is not available who could help
farmers maintain accounts of their business. Recently Punjab Agricultural University,
Ludhiana has taken a lead in India in appointing Assistant Extension Specialist (Farm
Management) at each district headquarters. One of their functions is to help farmers maintain
farm records and accounts. They have started assisting farmers to maintain systematic records
and accounts on demonstration centres in each district. Such a service needs to be further
strengthened. Further, the farmers can be organized in farm record associations. These farm
records associations will help their members-farmers in maintaining accounts, analyzing the
data and interpretation of results.
7. Non-availability of suitable farm record books
Lack of standardized, easy to understand and maintain account books or pro forma also
stand in the way of willingness of the cultivators to keep records. Standard farm record books
need to be developed which may be simple and easy to understand and available in local
languages. The Department of Economics and Sociology, Punjab Agricultural University, has
designed a very simple record book which can meet the requirements of majority of Indian
farmers.
8. Fear of Taxation
Farmers are always afraid of new taxes. They fear that if they maintain records and accounts
and their incomes show up high, some sort of tax may be levied on them.
**********
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 18
Exercise No: 3 Date:
Title: Study of farm inventory.
Farm Inventory
An inventory is a list of all assets and liabilities, which are claims of debits against the
business. It includes item by item all the property or assets things owned or possessed for the
field Operations for growing crops and all other cultivation accounts receivable as well as all
liabilities.
Meaning of Farm Inventory
Farm inventory is complete list of farmer ‘s assets with their valuation at a point of time .an
inventory repeated at another points of time would account for depreciations or
appreciations of assets and their sale or purchases during time between the inventories . The
differences between two inventories reflect profits or loss during the periods .Usually
periods refers to an agricultural year and inventory at beginning of year compared with that
at the end of year.
Definition
It is a list of all the physical property of a business along with their value at specified date. It
is the complete list of farmer’s assets.
Purpose of Farm Inventory
a. A complete form inventory taken at the beginning of each season will give a list of
all the assets with their values; it shows what amount of capital goes on the business.
b. The farm inventory is a necessary step in completer farm accounting
c. The inventory provides a basic for computing growth in net worth
d. It enable to work out the measures of income
e. It enable to determine the depreciation cost
f. It helps to work out the value of last year takeover of stocks and this year leftover.
g. Basic for income statement, net farm income cannot be calculated without
inventories
It reveals the change in net worth through comparison of a farm inventories taken at
beginning of the year with another assembled at the end of year.
Objective of Farm Inventory
1. Understanding Size of Farm
The production of crop mainly depending on size of holding of farmer. Large size of holding
in to compact, block give maximum productivity as compare to small and marginal farmer
land holding. It shows size of land holding depend on capacity of farm to obtained production
from different enterprises.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 19
2. Comparison of Assets in a year
The farm inventory shows value of assets of the farm of last financial years and addition
made during the present year and also shows increase or decrease farm of assets
3. Knowledge about Sources
It provides knowledge about various resources that can produce farm income and also shows
efficiency of farm for agricultural. Production
4. Helpful For Income Statement
The income statement can make easily on the basis of farm inventory, which indicate
expenditure and income of various farm enterprises.
5. Calculation of Depreciation Cost
It necessary remains in calculating farm cost and returns. The list of farm inventory becomes
as basis to calculate depreciation cost of various assets.
Time for taking Farm Inventories
The best time to take farm inventory on most of the farms is at the beginning of the Agril.
Year. Usually at this time of the year the crop season is finish and work for the next season
has not yet began which makes the inventory jobs of physical measurements of these items
and estimates of value relatively easy.
Process of taking Farm Inventory
1) Physical counting
2) Valuation of physical assets
The physical counting is necessary to verify numbers, weights and measurements.
Losses, wastages of shrinkages are always occurring and can cause considerable error if
the inventory not made carefully.
The farmer should place value on each item using an appropriate valuation method.
Valuation of farm assets presents a most complex problem because an error in the
valuation of an inventory may result misleading. Value of assets is calculated by their
present value and value of different particulars is calculated on the basis of market
conditions. Valuation of physical assets sometimes results into over valuation.
Example: Suppose a farmer has 200 Qtl. Wheat and the value is Rs. 82/Qtl instead of
Rs. 80/Qtl. This results into overvaluation by Rs. 400.
Components of Farm Inventory: There are three types of farm inventory.
1) Assets
2) Liabilities
3) Net Worth Statement (Balance Sheet)
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 20
A) Assets:
An asset is physical properties or intangible right owned by business or an individual that
have value.
Assets are classified into followings types:
1) Current Assets
These consists of cash on hands, bill recoverable , crops fed on hand, livestock that is
or will shortly be in conditions for sale. Current assets may be considered as assets
which in the normal operations of business will be liquidated within the accounting
year.
2) Working Assets
They are more liquid than fixed assets, such as farm machinery and equipments etc.
for example, breeding and producing live stock. This will ordinarily be worn out in
the normal process of business. Their value may be regarded as being transferred
slowly to products of farm operations.
3) Fixed Assets
They are of the nature that it is difficult to convert them into cash to meet any current
obligations. For example, land buildings and other long lived inventory structure.
B) Liabilities
The debt or amount of money owned by individuals, partnership of corporations toother is
called liabilities
Liabilities are commitment of farmer .this may be in the form of loan , promissory notes
materials bought on credit etc.
Liabilities are three types
a) Currents liabilities: repayment of these liabilities may be immediately paid
b) Intermediate liabilities: These can be differed or post pounded for the present ,
but fall due within year .
E.g. promissory notes, medium term and short term loans
a) Long term/duration liabilities: these are those which do not require repayment
during current accounting periods.
E.g. long term loans
3) Net Worth Statement (Balance Sheet)
Net worth statement shows the financial condition and stability of the business at a
particular point of time. Net Worth is shown as excess of assets over liabilities.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 21
Procedure for farm inventory analysis:
1. Preparing list of all assets through physical counting on a specific dates - current and
fixed assets or depreciable assets and non-depreciable assets. The physical count may
be through numbers, weights and measurements.
2. Valuation of each item using an appropriate valuation method. An error in valuation
may render the accounting financial analysis results misleading.
3. Repeat the steps 1 and 2 after a year or say at the end of the year.
4. Measure the difference in inventory at the beginning (opening inventory) and end of
the year (closing inventory). Observe whether the farm business has appreciated or
depreciated during the period.
*****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 22
Exercise No. 4 Date:
Title: Study of System of Book Keeping.
The system of book keeping means the procedure of recording the transaction for a year in
the books of accounts.
There are two systems of Book Keeping.
a. Double Entry system
b. Single Entry system
a) Double Entry System: It is a method of recording each transaction in the books of
accounts in its two fold aspects i.e. two entries are made for each transaction in the same set
of books, one being a debit entry and other a credit entry. Every business transaction involves
two parties one, for receiving the goods or services and other for giving them. Every
transaction, therefore, is entered at two places, for credit and for debit.
To understand the double entry system of book keeping all that we need to do is, to remember
the fundamental rule; “Debit the account which receives the benefit, and credit the
account, which gives the benefit.”
For example:
Suppose Mr. A has purchased goods of Rs.1000 for cash from Mr. B, so here, on one hand,
he has received goods and on the other hand the cash is given to Mr. B. So, you should have
noticed that the goods have been acquired by giving up cash. Therefore, as its name signifies,
this system records both the aspects of a single transaction, i.e. the increase in goods with the
simultaneous decrease in cash.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 23
Advantages of Double Entry System:
1. Both personal and impersonal accounts are opened in order to keep a complete record
of business transactions.
2. It provides a check on the arithmetical accuracy with the help of trial balance.
3. It reduces the chances of committing errors.
4. It helps the trader to know his debtors (customers) and creditors (suppliers) from time
to time.
5. Financial position of the business unit can be known through the preparation of
balance sheet.
6. This system is useful to the tax and legal authorities.
b) Single Entry System: This is the system which ignores the double effect of transactions.
Only personal account of debtors and creditors are kept and the impersonal accounts are
ignored completely. This system is incomplete and inaccurate.
Difference between Double & Single Entry System:
Sr.
No. Double Entry system
Single Entry System
1
Double Entry system is perfect in its
arrangement and mathematically
accurate.
1
Single Entry system is faulty
incomplete & unscientific
2 Record of both personal and impersonal
accounts are kept 2
Only personal accounts are kept
3 Trial and balance account is possible
under double entry 3
Trial and balance account is not
possible
4 It is perfect, accurate and result are
more reliable 4
It is imperfect, less accurate and not
reliable.
5 It is preferable for big enterprises. 5 It is preferable for small enterprises.
6 Complete recording. 6 Incomplete recording.
7 Complex in nature. 7 Simple in nature.
8 Easy to identify errors. 8 Hard to identify errors.
9 Suitable for tax purpose. 9 Not suitable for tax purpose.
10 More laborious. 10 Less laborious.
11 More time consuming. 11 Less time consuming.
12 Costly but scientific. 12 Economical but unscientific.
****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 24
Exercise No: 5 Date:
Title: Study of Farm Accountancy.
Farmers can make use of the accountancy to keep a close watch on the farm business. It also
helps in the management of any supplementary enterprises taken up by the farmers on
business lines.
Terms and Concept in Farm Accountancy
Account is the summary of business transactions.
Accounting is the art of recording (writing in journal), classifying (writing in ledger) and
summarizing (preparation of trading account, profit and loss account, balance sheet) the
business transactions.
Accountancy means the art of keeping books of account in a regular and systematic manner.
Single Entry System
Under this system a trader can get information about debtors, creditors and cash but not about
other matters. This system is incomplete and inaccurate.
Double Entry System
Recording a transaction from two different angles is known as double entry system. Debit the
account receives benefits and credit the account gives the benefits.
Journal
All the business transactions are first recorded in book called journal. It means a daily record.
The journal is also called as a “book of original entry”.
Ledger
Ledger is a chief book of accounts. The entries made in journal are transferred to ledger.
Journal contains information in the form of entries but ledger contains information in the
form of accounts.
Cash Book
Transactions relating only to cash are recorded in one book called cash book. The principle
here is, cash coming in is placed on debit side and cash going is entered on credit side.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 25
Trial Balance
The accountant prepares a list of all the ledger accounts with their closing balances indicating
the details of debit and credit, such a list of balance is known as the trial balance.
Final Accounts
The summaries of ledger accounts are known as final accounts. It is organized in such a
manner as to reveal
a. The profit made or the loss sustained during a period.
b. The financial condition of the business concern at the end of the period.
Final accounts are described as
i. Trading Account.
ii. Profit and Loss Account.
iii. Balance Sheet.
Exercise for students
Prepare the formats for Journal, Ledger, Trial Balance and Cash book of a business.
*******
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 26
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 27
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 28
Exercise No: 6 Date:
Title: Study of measures of farm income.
________________________________________________________________
Cost Concepts: Cost concepts are widely used because of their relevance in the decision
making process. This means that these costs serve as a basis to expand the size of the farm, to
buy the requisite capital assets in the long run and the requisite inputs in the short run.
The different costs involved in the production of crop and livestock products are:
a. Labour Costs.
b. Machinery Costs.
c. Livestock Costs.
d. Land Costs.
e. Building Costs.
f. Input Costs.
g. Interest on Working and Fixed Capital.
The following concepts can be used for easy calculation of the cost of cultivation.
1) Depreciation for buildings: 2 per cent for pucca building; 5 per cent for tiled building
and 10 per cent for katcha building.
2) Depreciation for implements: 10 per cent for major implements and 20 per cent for
minor implements.
3) Depreciation for cattle: Appreciation in the value of animals during the first 3 years
would be at the ratio of 1:3:5.It remains constant during 4th and 5th year. Then it is assumed
that the value of animal depreciates @ 12.5 per cent per year from 6th to 14th year in
straight-line method.
4) Interest on working capital: 12 per cent per annum or opportunity cost of capital.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 29
Some of the cost concepts used in farm management studies by the Commission on
Agricultural Costs and Prices (CACP) of Government of India are A1, A2, B1, B2, C1 and C2,
which are defined as follows:
Cost A1: The following items are included in cost A1.
1. Wages of human labour (hired, contract and permanent).
2. Wages of bullock labour (owned and hired).
3. Charges of machinery (owned and hired).
4. Market value of seeds.
5. Market value of manures and fertilizers.
6. Market value of plant protection chemicals.
7. Market value of weedicides.
8. Irrigation charges.
9. Land revenue, cess and other taxes.
10. Depreciation on farm machinery, implements and farm buildings, irrigation
structures, etc.
11. Interest on working capital.
12. Other miscellaneous expenses (value of other items which are used up in
current production).
Cost A2 = Cost A1 + Rent paid for leased in land.
Cost B1 = Cost A1 or A2+ Interest on the fixed capital excluding land + rental value of owned
land.
Cost B2 = Cost B1 + Rental value of owned land less land revenue and Rent paid for leased in
land.
Cost C1 = Cost B1 + Imputed value of family labour.
Cost C2 = Cost B2 + Imputed value of family labour.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 30
Income measures: These are the returns over different cost concepts. Different income
measures are derived using the cost concepts. These measures include farm business income,
family labour income, net income farm investment income, etc.
Income measures in relation to different cost concepts
1. Farm Business Income = Gross Income - Cost A1 / A2.
2. Family Labour Income = Gross Income - Cost B.
3. Net Income = Gross Income - Cost C.
4. Farm Investment Income = Farm Business Income – imputed value family labour
Or
Net Income + Imputed rental value of owned land + Interest on owned fixed capital
invested.
Exercise for students
Prepare the Cost Concepts and Income Measures for any one crop.
*****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 31
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 32
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 33
Exercise No: 7 Date:
Title: Study of measures of farm efficiency.
________________________________________________________________
An important demand in farm business management or decision-making relates to the manner
in which available resources are allocated. A measuring indicator is necessary to provide the
standard for apprising accuracy of decisions regarding the use of resources.
Efficiency can be related to:
(1) The operation of farm business as a whole.
(2) Divide phase of the business, line of production or enterprise.
(3) To use of various factors of production or resources.
(4) To any single input
Various efficiency measures therefore need to be development to express technical efficiency
in various farms enterprises and related these to the financial success. The various farm
efficiency measures can be discussed as:
1. Physical efficiency measures (Technical Efficiency)
2. Financial efficiency measures (Value Efficiency)
They can be further categorized into:
a. Aggregate or absolute measures.
b. Ratio measures.
1. Physical Efficiency Measures:
a. Aggregate measures
i. Total area of the farm
ii. Number of livestock
iii. Total production
b. Ratio measures
i. Land use efficiency
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 34
Yield per acre= yield in quintals/ Area in acres
Production efficiency or Productivity of land. The production Efficiency is
expressed with respect to a particular crop.
Actual Crop yield on the farm
Production efficiency = -------------------------------------- X 100
Average yield in the locality
Calculate the Production efficiency of a farm from the following data.
Paddy yield/ha = 40 q. Average yield of paddy/ha in the locality = 35 q.
Ans.
Crop Yield Index: It is a measure to compare the yield of all the crops grown
on the farm with that of average yields of same crops in the locality.
Production Efficiency of each crop X Area of each crop
Crop Yield index= -----------------------------------------------------------------------
Total Area of the crops on the farm
Calculate the Crop Yield Index from the following data:
Crop
Average Yield Crop
acreage
on
selected
farm (ha)
Production
efficiency
Production
efficiency
x
crop
acreage
Given
locality
Selected
farm
Paddy (q) 68 80 4 117.65
Sugarcane
(tonnes) 90 110 6 112.22
Total -- -- 10 --
Intensity of cropping: It measures extent of land use for the production of
crops during an agricultural year.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 35
Gross cropped Area
Intensity of cropping = ----------------------------------------- X 100
Net cropped Area
Calculate the cropping intensity, if a farmer is raising three crops in an
agricultural year in his 10 hectare of irrigated land.
ii. Labour efficiency
Crop Area in Acres
Crop Acreage per Man Equivalent Year = ------------------------------------
Man equivalent year
Total labour contribution
Man Equivalent year = -------------------------------------
12 months
Total Productive Man Work Units
Productive Man Work Units = ------------------------------------------------
per Man Equivalent Year Man Equivalent Year
iii. Machinery efficiency
Horse power /acre of land available & used.
2. Financial Efficiency Measures:
Aggregate measures
(i) Total capital invested: Total of Investment on Fixed Assets and Working Assets represents
size of farm.
(ii) Gross income or Total Value of Production: Total income derived from sale of main
produce as well as by produce in a agricultural year.
(iii) Gross expenses: It includes working and fixed cost of the farm.
(iv) Net worth = Total assets – Total liabilities
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 36
Farm Income and Profit Efficiency Measures
(i) Net cash income = Gross cash income – Cash expenses
(ii) Net farm income = Net cash income - Operating Cost
(iii) Farm earning = Net farm income + value of farm products consumed at home
(iv) Family labour earning = Farm earning – interest charges on Fixed capital
(v) Returns to management = Family labour earnings – imputed value of family labour.
Ratio measures
Fertilizer cost
Fertilizer costs per crop acres = ----------------------------------------
Total crop acres
Total cost of machinery
Power and equipment cost per crop acre = -----------------------------------
Total crop acres
Cost Ratio: These ratios provide information to the manager to decide whether
the existing costs of the business farm are higher or lower.
Operating expenses
o Operating ratio =----------------------------------------
Gross Income
Fixed costs
o Fixed cost ratio =---------------------------------------------
Gross Income
Total costs
o Gross Ratio = ------------------------------------------------
Gross income
Solvency Ratios: These ratios measure the degree of financial safety
(solvency) and liquidity of comparable business farms at a point of time.
Current Assets
o Current Ratio = ---------------------------------
Current Liabilities
Current assets + Intermediate assets
o Intermediate ratio = ---------------------------------------------------------
or Working ratio Current liabilities + Intermediate liabilities
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 37
Total assets
o Net capital ratio = -------------------------------
Total liabilities
Debt or Total Liabilities
o Debt Equity Ratio= ----------------------------------------
Owner’s Equity
Net Income
Income Ratios: Net Income per Acre = --------------------
No. of Acres
Capital Ratios
Gross Income
o Rate of Capital Turnover = --------------------------------- x 100
Total value of farm assets
*******
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 38
Exercise no: 8 Date:
Study of farm planning techniques and situations.
Farm Planning:
All planning is a matter of forecasting. It is an attempt to state logically in conformity with
the economic principles as to what will happen in the future. Evidently planning is to serve as
a blue print for the future. All business undertakings plan their production and marketing
operations consciously in respect of what how much, how to produce and when and where to
buy and sell. The planning of operations and their execution is secret of their success. In
agriculture also planning is must. Therefore farm planning has been defined by different farm
economists as under.
1. Farm planning is a process to allocate the scare resources of the farm to organize the
farm production in such a way as to increase the resource use efficiency and the
income of the farmer.
2. Farm planning is process of deciding in the present what to do in the future about the
best combination of crops and live stock to be raised through rational use of
resources.
3. Farm planning is mainly a process of choice making or choosing from among
competitive alternatives. It is concerned with various adjustments the farmer makes in
the existing organizations with the purpose of making the most profitable USC of
scarce resources.
Objective of Farm Planning:
1. The immediate objective of farm planning is to maximize the annual net income
sustained over a long period of time.
2. The maximization of net income through improved resource use planning.
3. The ultimate objective of farm planning is improvement in the Standard of living of
the farmer.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 39
Importance of Farm Planning:
The importance of farm planning can be examined through its helpfulness (or usefulness). In
view of this following things are very important (Advantages).
1. It enables the farmer to achieve his objectives in relation to his farm and family in a
more organized manner.
2. Farm planning enables a careful examination of the existing resources and their best
allocation.
3. It helps farmer to take decisions in relation to selection of crops, hectarage under
different crops and kind and number of live-stock to be maintained.
4. It helps the farmer to identify the input and credit needs.
5. It helps in estimating future cost and returns.
Steps in farm Planning:
To have a best farm plan, some steps are needed to follow while farm planning is prepared.
1) Preparing the farm map: The general lay out of the farm, number and shape, irrigation
channels can be shown in the farm map.
2) Recording the History of the Farm: It is very important to obtain the information
pertaining to utilization of resources and their efficiency. What was the crop rotations
followed previously, etc on the basis of this information planning in respect of crops to be
grown, crop rotations to be followed; requirement of credit along with their sources etc can
be possible.
3) Planning Bullock and Human Labour Requirement: Next a calendar of farm operations
should be prepared and bullock and human labour requirements determined for different
months. A labour schedule should be developed as to guide a farmer to appraise the amount
of labour need in relation to the availability.
4) Planning the Land Use and Soil Conservation practices: When a full picture of the
resources and their appraisal is obtained, the next step in farm planning is to adopt such
practices which would lead to the best use of land. While planning the cropping scheme, due
importance should be given for soil conservation. Therefore purposively crops and crop
rotations need to be introducing a plan which will enhance soil conservation.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 40
5) Planning Live stock Programme: Live stock and crop production is having
supplementary relationship. The size of live stock depends upon size of farm, cropping
intensity, availability of irrigation etc. If irrigation water is ample naturally cultivator can
grow fodder crops throughout year and he can maintain milch animals more.
6) Planning the Marketing of Produce: Only production is not sufficient to maximize the
returns, good price for the produce is also important. Therefore, study of market conditions,
prices etc. are essential to decide the time of selling. Similarly the agency through which
marketing is to be done must be identified in view of getting maximum shares in consumers
price.
Farm Planning Techniques
With a proper understanding of the planning environment and use of precise input-output
data along with true and realistic constraints, sophisticated techniques give better results.
However, common sense in the planning process could lead to fairly good results. Some of
the farm planning techniques are listed below:
1. Budgeting.
2. Linear Programming.
Budgeting is most informal of all the planning techniques and the level of sophistication
gradually increases as we move from budgeting to linear programming.
*****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 41
Exercise no: 9 Date:
Study of farm budgeting techniques and types.
Farm Budgeting
After farm planning budgeting is undertaken. Budgeting is a method of analyzing plans for
the use of agricultural resources at the command of the decision maker. Farm plan is a
programme of the total farm activity of a farmer drawn up in advance. Farm plan serves as
the basis of farm budgeting. Therefore farm plan can be prepared without a budget but
budgeting is not possible without farm plan. Therefore the budgeting can be defined as under.
1. The physical aspects of farm planning when expressed in monetary terms called
budgeting.
2. The expression of farm plan in monetary terms by estimation of receipts, expenses
and net income is called budgeting.
3. Farm budgeting is a process of estimating costs, returns and net profit of a farm or a
particular enterprise.
4. Budget is a statement of estimated income and expenditure.
We will be concerned with both planning and budgeting as the budget helps us to evaluate
alternative plans and select the one that is most profitable. Therefore farm planning and
budgeting go side by sides.
Types of farm budgeting:
There are two types (methods) of farm budgeting.
a) Partial budgeting
b) Complete budgeting.
a) Partial budgeting: Partial Budgeting is a statement of changes in costs, returns and
profitability for a minor modification. When a farmer does few modifications or minor
changes in the existing enterprise of farm business, partial budgeting technique is employed.
It consists of four important elements
1. Added Costs: Additional cost incurred, after introduction of a new enterprise or
change in existing enterprise.
2. Added Returns: Additional returns incurred, after introduction of a new enterprise or
change in existing enterprise.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 42
3. Reduced Returns: Decrease in returns, after elimination of existing enterprise.
4. Reduced Costs: Decrease in costs, after elimination of existing enterprise.
b) Complete Budgeting: It is also called as total budgeting. It refers to preparing budget for
the farm as a whole. Complete budgeting considers all the crops, livestock, methods of
production and aspects of marketing in consolidated form and estimates costs and returns for
the farm as a whole. Therefore complete budgeting can he specifically defined as “An
estimation of the probable income and expenditure made for the farm as a single unit of
course, a complete budget is required when a farm plan is prepared for new farm or when
drastic changes are suggested in the plan of the existing pattern on an established farm”.
Complete budgeting can be prepared for short run (annual budget) and for long run.
Advantages of Farm Budgeting
It evaluates the old plan and guides the farmers to adopt a new farm plan with
advantage.
It makes the farmer conscious of the waste (leakage) in the farm business.
It gives comparative study of receipts, expenses and net earnings on different farms in
the same locality and in different localities for formulating national agricultural
policies.
It guides and encourages the most efficient and economical use of resources.
It serves as valuable basis for improvements in farm management practices.
Difference between Complete Budgeting and Partial Budgeting.
Sr.
No. Partial Budgeting Complete Budgeting
1) Only variable costs are considered Both variable and fixed costs are considered
2) While calculating net income only
variable costs are considered
While calculating net income both variable
costs and fixed costs are considered
3) Requires relatively less effort and time
for preparation
More efforts and time required for
preparation
4) It is based on a stable condition of farm It is made keeping in view the major
changes in the farm business
5) Only a particular operation of the farm
is considered as a unit
All the farming activities are included
6) As it is concerned with the specific
activity, so size of budget is small
All the enterprises are considered, so size of
budget is larger
7) Cannot give the idea of total income of
the farmer
Gives the idea of the total income of the
farmer
8) Full information about all the
resources cannot be available
Gives full information about all the
resources available on the farm
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 43
Example:
Substitution of sunflower crop which is newly introduced enterprise for Groundnut which is
existing enterprise. For this substitution on the farm following resources should be
substituted.
Sr.No. Particulars Existing situation
Groundnut (Rs.)
Alternate Situation
Sunflower (Rs.)
1. Human Labour 1474 1017
2. Bullock Labour 872 831
3. Manures 864 902
4. Fertilizers 1164 1023
5. Seed 2200 800
Total cost / ha. 6574 4573
Gross Income / ha. 11,158 11,280
Added Costs Added Returns
Manures Rs. 38 Rs. 122
Reduced Returns Reduced Costs
NIL Human Labour Rs.457
Bullock Labour Rs.41
Fertilizers Rs.141
Seed Rs.1400
Added Costs+ Reduced
Returns = Rs. 38 Added Returns + Reduced
Costs = Rs. 2161
Net Change = 2161-38 =Rs. 2123
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 44
Exercise no: 10 Date:
Study of problems of partial budgeting.
Substitution of Alfalfa fodder crop which is newly introduced enterprise for Corn silage
which is existing enterprise. For this substitution on the farm following resources should be
substituted. So, prepare a partial Budget.
Sr. No. Particulars Existing situation
Corn Silage(Rs.)
Alternate Situation
Alfa-Alfa (Rs.)
1. Seed 400 230
2. Fertilizers 5000 3500
3. Chemicals 3500 1000
4. Crop insurance 400 -----
5. Fuel 2500 -----
6. Hired labour 900 1350
Total cost / ha.
Gross Income / ha. 36000 50000
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 45
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 46
Exercise No. 11 Date:
Study of Cost ratios and Capital ratio.
Cost ratio:
Most of ratio or efficiency factor discussed up to this point are needed in the process of
analysis of the record .their purpose ,in general is to indicate a strong or weak point in the
organization or operation of the business and to call attention to the specific phases or angles
of the business where greater managerial attention is needed . in addition ,there are other
ratios that are often used in a more general analysis . they did the relationship between costs
and returns , relationship of capital investment to income ,and the rate of activity or turnover
of the capital.
Cost ratios are averages and their magnitude reflects physical production efficiency, selection
of enterprises ,prizes received for commodities and the expense for the production element .
These cost ratios are discussed below:
1. Operating cost ratios:
The operating ratios is the percentage which operating expenses absorbed out of gross profit
,it shows the proportion of total income used in (1)hiring labour (2)buying seed ,fuel and
other annual supplies and (3)in keeping equipment in operation ,etc
It is computed by diving total operating expenses by gross profit &
Operating cost ratio= Total operation cost
Total profit
Improvement in operating efficiency is directly reflected in this ratio. It should be
watched closely from year to year. It may also increase & decrease because income may
increase or decrease due to commodity price changes
2. Over –Head Charges (Fixed Ratio):
Fixed expenses continue in about the same amount regardless of the current operating
policy. Their relative importance in production can be expressed by a ratio determine by
dividing the total fixed cost by the gross profits.
The fixed costs generally include: 1) Land revenue 2) Water taxes 3) Other taxes 4)
Depreciation 5) Yearly insurance premium 6) Interest on total investment, etc
Over –Head Charges ratio = Total Fixed cost per year
Gross income
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 47
For growing efficient business, the rate of increase in gross income should be faster than rate
of increase in fixed cost. The fixed cost ratio will vary with changes both in gross profits &
fixed costs. Little can be done to reduce total fixed cost with in short period but their
magnitude relative to output can be reduced by expanding production while holding
buildings& other such overheads i.e. capital, investment constant. Costs per acre. Both
operating & fixed costs per acre can be computed as total cost / number of acres. These ratios
do not very with selling prices & income as does ratio of fixed or operating costs per unit on
gross profit. They are somewhat meaningless when crop & livestock are intermingled in
varying proportions only farm with similar enterprises can be compared with these ratios.
Gross (cost) Ratio:
The Gross (cost) Ratio or ratio of total expenses to gross income is a combined measure of
the profit making ability of the farm. While the net income expresses the amount by which
income exceeds expenses: the gross ratio expresses the % of gross income consumed by the
expenses & is , therefore, independent of the absolute size of the business . Gross income &
total expenses both affect the ratio. It may be large or small depending on the level of prices
as well as amount & level of expenses. It is indicating of the profit margin for the business as
the whole. At any given costs &prices, it can be usefully employed in the analysis of the
business. The percentage of the gross income absorbed by expenses also varies with the type
of the farm. With this ratio, comparisons between the farms should be made only when the
farms are of the same general organization.
Total cost
Gross (cost) ratio =
Gross income
Capital ratios:
Capital ratio can also be used in the analysis of organization with respect to the resources
of the farm.
1. Capital per unit of gross income:
Occasionally, a ratio of computed to measure the total amount of capital invested per unit
of gross income (say thousand rupees)
Capital per unit of gross income= Total capital invested
Gross income
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 48
2. Capital per man:
The ratio of capital man indicates the combination of resources in a general way. It is,
ordinarily, computed by dividing the total capital by the number of man –year equivalents
employed on the farm. An optimum ratio will vary depending on the kind of farming & the
availability of funds. It does not adequately reflected variations which can be possible
through capital labour substitution.
3. Rate of capital turnover:
It is the most common measure capital efficiency. It is the ratio of the total farm income
to the farm capital (total farm assets)
Gross income
Rate of capital turnover = ×100
Total farm assets
The rate of capital turn over indicates the number of years required for the farm receipts
(income) to equal the average farm capital. A faster turnover rate is sign of good farm
business. A high rate of turnover is especially important for the beginning farmer who is short
on capital. This rate ordinarily varies widely with the type of investments.
*****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 49
Exercise no: 12 Date:
Study of Balance Sheet and Financial Ratio analysis.
Balance sheet indicates an account of total assets and total liabilities of farm business
revealing financial solvency of business.
More specifically it is a statement of financial position of a farm business at a particular time,
showing its assets, liabilities and equity. If assets are more than liabilities it is called net
worth or equity and its converse are known as net deficit. It shows assets on left side and
liabilities and equity on right side. Both sides are always in balance hence name balance
sheet.
Net worth is placed on right side, along with liabilities, in order to indicate that like any other
creditor farmer has claim against farm business equal to equity amount.
It can be prepared at any point of time to know financial position of farm business. It can also
be prepared to study performance of a business over years by preparing same number of
balance sheets.
If net worth increases over different periods, it indicates efficient performance of business.
To prepare a balance sheet prime requisites are total assets and total liabilities of farm.
Components of Balance Sheet
Assets: Assets are those which are owned by the farmer.
Liabilities: These refer to all things which are owed to others by the farmer.
Assets & liabilities are of three types.
Current assets: They are very liquid or short-term assets. They can be converted into cash
within a short time, usually one year. For example, cash on hand, Agril. Produce ready for
disposal i.e., stocks of paddy, black gram, Jowar, wheat, etc.
Intermediate or working assets: These assets take two to five years to convert into cash
form. Examples: Machinery, equipment, livestock, tractors, trucks, etc.
Long term assets or fixed assets: An asset that is permanent or will be used continuously for
several years is called a long-term asset. It takes longer time to convert into cash due to
verification of records, legal transactions, etc.
Examples: Land, Farm buildings.
Current liabilities: Debts that must be paid in the short term or in very near future.
Examples: Crop loans, other loans, cost of maintenance of cattle, etc.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 50
Intermediate liabilities: These loans are due for the repayment within a period of two to five
years. Examples: livestock loans, machinery loans, etc.
Long-term liabilities: The duration of loan repayment is five or more years.
Examples: Tractor loan, orchard loan, land development loan, etc.
Balance Sheet of a Hypothetical farm
Assets Amount Liabilities Amount
Current assets Current liabilities
Cash on hand 10,000 Crop loans to be repaid to 8,000
Savings in bank 8,000 Institutional agencies
Value of grains ready for disposal 38,500 Cost of cultivation (excluding loans)
6,000
Livestock products (eggs, birds, etc.)
60,000 Other loans (unsecured loans due for immediate repayment)
5,000
Fruits, Vegetables, Fodder and feed ready for sale
8,000
Cost of maintenance of cattle Costs in poultry enterprise
3,600
Annual installments’ shares to be realized in the same year.
2,000 Money Owed to Input Suppliers Annual installments
25,000 19.000
Sub total 1,26,500 Sub total 66,600
Intermediate assets Dairy cattle Bullocks Poultry birds Machinery and equipment Tractor
10,000 9,000 15,000 15,000 1,75,000
Intermediate liabilities Livestock loans Machinery loan Unsecured loans (Land Development)
8,000 15,000 10,000
Sub total 2,24,000 Sub total 33,000
Long-term assets Land Farm buildings
6,00,000 25,000
Long-term liabilities Tractor loan Orchard loan
1,20,000 25,000
Sub total 6,25,000 Sub total 1,45,000
Total assets 9,75,500 Total of liabilities 2,44,600
New worth or equity 7,30,900
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 51
Test Ratios
The test ratios, viz.
1. Current ratio/ Liquidity Ratio/Cash Asset Ratio/Cash Ratio
2. Intermediate ratio
3. Net capital ratio
4. Current liability ratio
5. Debt-equity ratio
6. Equity-value ratio
Can be derived from the balance sheet.
Current Assets
1. Current Ratio = --------------------------
Current Liabilities
Current Ratio should be higher i.e. more than 1.
This ratio indicates capacity of farmer to meet immediate financial obligations (liquidity).
Total current assets + Total intermediate assets
2. Intermediate ratio = ----------------------------------------------------------------
Or working ratio Total current liabilities + Total intermediate liabilities
This indicates liquidity position of farm business over an intermediate period of time, ranging
from 2 to 5 years.
Total assets
3. Net capital ratio = ---------------------------------
Total liabilities
It indicates long-term liquidity position of farmers.
If net capital ratio is more than one, funds of institutional agencies are safe.
Cash receipts + accounts receivable + marketable securities ( bonds, shares, etc.) available in more than one year
4. Acid test ratio = ---------------------------------------------------------------------
Or Quick ratio Total current liabilities
This reflects adequacy of cash and income surpluses to cover all current liabilities during the
period of one to two years.
Current liabilities
5. Current Liabilities Ratio=------------------------------------------------
Owner’s Equity
A ratio of less than one indicates a healthy performance of farm business and over the
years.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 52
Debt or total Liabilities
6. Debt Equity Ratio= -------------------------------
Owner’s Equity
A consistently falling ratio indicates a very heartening performance of farming and ability of
farmer to reduce dependence on borrowings. This presents capacity of farmer to meet long-
term commitments.
Owner’s equity
7. Equity-value ratio = --------------------------
Value of assets
The improvement in the ratio over the years makes it crystal clear regarding the increased
strength in the financial structure of the farm business.
Assignment
Work out all the test ratios on the basis of given hypothetical balance sheet and write down
the Conclusion based on it.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 53
Exercise no: 13 Date:
Study of Income Statement.
In income statement the items included are receipts, expenses, gains and losses.
It could be defined as a summary of receipts and gains minus expenses and losses during a
specified period.
It is prepared for entire farm for one agricultural year.
It is also prepared over time.
Advantages of this statement are that it indicates trend in various cost items and whether
there has been any over expenditure on farm.
Income Statement basically constitutes three items:
Receipts: They mean the returns obtained from the sale of crop produce and other
supplementary products like milk and eggs, wages, gifts, etc. Gain in the form of appreciation
in the value of assets is also included in the receipts. However, returns from the sale of capital
assets, such as livestock, machinery , farm buildings, etc. are not included because such
returns/income are not really obtained during the period.
Expenses: Operating and fixed costs are recorded here. Losses in the form of depreciation on
the asset value fall under the expenditure item. However, the amounts incurred on the
purchase of capital assets are not considered.
Net income: It constitutes net cash income, net operating income and net farm income. It
helps to know success or failure of a business farm over time.
Net cash income: It gives position of cash receipts minus cash expenses only during period
for which income statement is prepared.
Net operating income: It is arrived at by deducting operating expenses from gross income.
Fixed costs are not given any consideration. Operating expenses include crop loans.
Net farm income: Net farm income equals net operating income less fixed costs. Compared
to net cash income and net operating income, it is relatively a better measure of assessing
performance of a farm. It is return accrued to owned capital and family labour employed.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 54
Income Statement of a Hypothetical Farm
Particulars Amount
I. Receipts
Returns from the sale of crop output (paddy + pulse) 52,000
Revenue from milk and milk products 5,000
Returns from poultry enterprise 12,000
Returns from supplementary enterprises 17,000
Gifts 2,000
Gross cash income 88,000
Appreciation on the value of assets 3,000
Gross income 91,000
II. Expenses Operating expenses or costs
Hired human labor 10,500
Bullock labor 900
Machine labor 1,500
Seeds 1,100
Feeds 5,000
Manures & fertilizers 3,000
Plant protection measures 1,550
Veterinary aid 500
Irrigation 250
Miscellaneous 2,000
Interest on working capital 8% 2,100
Total operating expenses 28,400
Total Fixed Expenses
Depreciation 3,000
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 55
Net cash income =
Net operating income =
Net farm income =
Financial Test Ratios
Operating ratio
Fixed ratio
Gross ratio
Total operating expenses
1. Operating ratio = ------------------------------------
Gross income
This ratio underlines magnitude of working expenditure incurred for a rupee of gross
income.
Fixed expenses
2. Fixed ratio = -----------------------------
Gross income
This is indirect ratio, since fixed costs are indirect costs.
Total expenses
3. Gross ratio = -------------------------------------
Gross income
This can be called input–output ratio.
All these ratios should be less than one to indicate profitable run of farm business.
Assignment
Work out all the financial test ratios on the basis of given hypothetical balance sheet and
write down the Conclusion based on it.
Land revenue 200
Rental value of land 10,000
Interest on fixed capital 3,200
Total Fixed Cost 16,400
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 56
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 57
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 58
Exercise no: 14 Date:
Study of methods of valuation of farm inventory.
Methods of valuation of Inventory:
The following methods are commonly used in valuation of farm assets.
1. Cost minus/less depreciation: Working capital assets such as machinery and
equipment livestock can be valued by use of cost minus depreciation.
2. Market prices: Farm supplies like seeds, fertilizers, pesticides, fuel, feeds, veterinary
medicines, etc can be valued at the cost of the market price.
3. Cost: This method is used to estimate current value of the farm produced inputs like
seed, FYM, etc. Standing crop is also valued through this method. Regarding valuing
standing crop, expenses incurred in raising the crops, till the date on which inventory
is taken are recorded.
4. Net selling price: All assets that will be sold within the year can be valued at the net
selling price (sales price-marketing costs). For crops, livestock products meant for
sale in the market.
5. Replacement cost minus/less depreciation: Old farm buildings are valued by
replacement cost minus depreciation method. New farm buildings may be valued at
cost minus depreciation.
6. Income capitalization: Asset which yields income over an infinite period of time is
evaluated using this method. E.g. Land.
The formula is
V=R/r
V = Income capitalized value.
R = Net income from land per annum (assumed to be constant).
r = Rate of interest.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 59
Selection of the Method of Valuation
Following are some of the suggestions which can be useful in valuation of the farm assets
1) All assets that will be sold within the year can be valued at the net selling price.
2) All supplies can be valued at the cost or the market price (whichever is lower).
3) Working capital assets such as machinery and equipment can be valued by use of cost
minus depreciation method.
4) The farm buildings that have been constructed a long time ago can be valued by
replacement cost minus depreciation method. The firm buildings that have been
constructed only a short time ago may be valued at cost minus depreciation.
5) Farm land may be valued with capitalization formula in combination with market
price.
******
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 60
Exercise No: 15 Date:
Title: Study of farm adjustment programme under uncertainty.
_______________________________________________________________
Uncertainty- prevails when all possible outcomes of events are unknown and neither
probability nor outcome is known. It is not measurable.
As such farmer is helpless to take advantage of insurance to protect his farm business.
It is a state of being doubtful about future events which cannot be foreseen exactly.
Agril. Prices are of uncertain nature. Yield is predicted with uncertainty. Natural calamities
like floods, famines, losses by pests & diseases cannot be predicted with any degree of
accuracy.
Types of Uncertainty
1. Price Uncertainty
2. Yield Uncertainty
3. Technological Uncertainty
4. Institutional Uncertainty
1. Price Uncertainty
It is associated with price of products and inputs.
2. Yield Uncertainty
Fluctuations in yield are associated with weather conditions & incidence of diseases &
pests and impact of new practice.
3. Technological Uncertainty
Technological changes influence production & create conditions of variability which in
turn lead to uncertainty
4. Institutional Uncertainty
Conditions of tenure, functioning of credit agencies, outlook & action of farmer are
examples of institutional uncertainty.
Steps of Risk and Uncertainty:
1. Diversification
2. Flexibility
3. Liquidity
4. Capital Rationing
5. Crop Insurance
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 61
1. Diversification:
It refers to producing more than one crop or allotting farm resources to more than one
enterprise.
Diversification enables farmer to combine products to take advantage of
complementarity & supplementarity till products become competitive.
It enables him fuller utilization of resources & tends to reduce income variability.
Enterprise combinations are arranged in such a way as to generate income flows at
different times of year in order to reduce income variability.
2. Flexibility:
It refers the capacity to change plans quickly and cheaply. It avoids danger associated
with rigid operations through reallocation of resources in event of changed situation.
Short duration crop enterprises such as vegetables, cereals and also dual-purpose
animals are examples of flexible approach.
3. Liquidity:
It is particular type of flexibility whereby a cash is maintained for purpose of taking
advantage of suitable opportunities which arise for purchase or investment likely to
result in a large gain.
Possible or likely changes in wages, costs and prices make a future return highly
uncertain.
Therefore, it is wise to keep adequate liquidity in terms of cash to meet the calamities.
4. Capital Rationing:
Farmer wishes to ration his investment among different crops and equipments. He
faces problem of indivisibility of capital many a times.
5. Crop Insurance:
It is an important technique of protecting farmers against the elements of risk in crop
production and stabilizing farm income.
It provides benefits to farmers such as security against failure of crops, credit
worthiness and confidence to take risks.
*****
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 62
Exercise No: 16 Date:
Title: Study of preparation of cash flow plan.
This is also known as cash flow summary or cash flow budget or flow of funds statement.
Cash flow statement is a summary of cash inflows and cash outflows of business organization
in particular period, say a season or year. It is usually prepared for future, hence the name
cash flows budget. The merit of particular statement is that, it helps asses the time at which
the funds are required for farming and other allied enterprises, source from which these can
be raised, the purpose for which the loan is required, the need sale and purchase of capital
assets, the time and quantum of repayment, etc. Now, let us see why the farmers borrow
funds from a particular source or sources; why he resort to transaction like selling of farm
products and livestock products and selling and buying of capital assets. The answers of these
questions are that the small and marginal farmers have poor resource base, and therefore,
borrowings aid them in continuing the farm business. Large farmers also borrow for farm
operations depending upon the need and time during which they cannot properly recycle the
funds. Farmers resort to sale of farm assets like milch cattle, machinery etc., because they
might have become worn out, for which replacements are to be made through purchases.
Cash flow statement is prepared at the beginning of the agricultural year and checked
every quarterly. For convenience, quarterly checks are made. The statement prepared over
the years serves the purpose of studying the pattern of expenditure and cash receipts and cash
balance that have been raised. A close scrutiny of the statement throws light on the
performance of the business.
I. Cash Receipts
1) Cash balance: This is the surplus amount of previous year with the farmer which stood at
Rs 3,000.
2) Total operating sales: These care the returns obtained from the sale of farm products and
livestock products. Lesser amounts are discernible in the first and second quarters, while the
returns to be obtained in the third and fourth quarter are on the higher side. The farmer is a
sure of getting returns from milk for about 250 days in a year which is more or less uniform
in the first three quarters. The returns from crop production will be received in the third
quarter for Kharif and the returns from Rabi crop s obtained in the last quarter. The total
operating sales amount to Rs 40,750 at the end of the year.
3) Total capital sales: The farmer is contemplating to sell the she-buffalo, which he
possesses, in the second quarter and the amount to be received will be Rs 5,000.
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 63
4) Non-farm income: It is the income which will be added by the family members by their
earnings elsewhere.
5) Borrowings: The farmer wishes to borrow an amount of Rs 7,500 for Kharif crop
operations.
6) Total: It is the summation of particulars of 1 to 5 rows which presents the total cash
receipts to be obtained in the year.
II. Cash Expenses
1) Operating expenses:
These include the expenditure to be incurred on the Kharif as well as Rabi crops and
the dairy cattle.
2) Capital Investment: Since the farmer proposes to dispose the dairy cattle in second
quarter, he wants to buy a new one in lactation in the third quarter.
3) Family living expenses: These include expenditure towards food, medical, education and
other items.
4) Payment of previous year’s debts: A hand-loan of Rs 500 is due to be paid in first
quarter.
5) Payment of ST loans and installments on investment loans: Since the farmer is
proposing to take a crop loan, the repayment of same falls due in the third quarter. Along
with the interest and installments the amount due to be paid would be Rs. 7968.
6) Total: It is the total expenditure to be incurred.
III. Cash Balance
It is the sum of amount to be realized after deducting expenditure from cash receipts.
Barring the second quarter, the farmer is expected to have a surplus in the remaining three
quarters. The deficit of Rs 1,650 in the second quarter can easily be cleared off from the
savings of previous quarter, i.e., first quarter. Overall, the net surplus would be Rs 12,332.
Cash Flow Statement of a Hypothetical Farm
Sr.
No Particulars
I quarter
(June-
Aug.)
II quarter
(Sept –
Nov)
III quarter
(Dec - Feb)
IV quarter
(Mar -
May)
Total
I Cash receipts (in Rs)
1 Cash balance
(brought forward
from previous year)
3000 - - - 3000
2 Total operating
sales ( Farm and
livestock products)
1350 1400 30200 7800 40750
Manual Prepared By: Vishwesh S. Dange, Asst Prof, Dept of Agri Business Management Page 64
3 Total capital sales
(milch cattle)
- 5000 - - 5000
4 Non-farming
income (family
members working
elsewhere)
2000 1500 2000 3200 8700
5 Borrowings
(ST,MT and LT
loans from
institutional
agencies )
7500 - - - 7500
6 Total 13850 7900 32200 11000 64950
II Cash expenses (in Rs)
1 Operating expenses 8500 6750 6200 5300 26750
2 Capital
investment(purchas
e of milch cattle )
- - 6000 - 6000
3 Family living
expenses
2400 2800 3200 3000 11400
4 Payment of
previous year’s debt
500 - - - 500
5 Payment of ST
loans and
installments on
investment loans
- - 7968 - 7968
Total 11400 9550 23368 8300 52618
III Cash balance (in
Rs)
2450 -1650 8832 2700 12332
Advantages of Cash Flow Budget:
It is summary of all financial matters of the farmer in a comprehensive report .This helps
1. To estimate the total credit needs (ST, MT, and LT) of farmer along with time and
quantum.
2. To plan the repayment schedule.
3. In making purchases and sales at the appropriate time thereby helping to minimize the
credit dependence.
4. To keep ready input requirements well in advance so that last minute rush can be avoided.
5. To know the farm household expenditure pattern, so that the farmers can keep limits to
avoid wastage.
6. The farmer to exercise a check on farm costs.
7. The farmer in preparing the farm business plans for the ensuring years.
8. The banker for revising the scales of finance, rescheduling loans etc., and
9. Finally, as a tool of financial control to the farmer.
******