Farm Management Flashcards
Functions of management
- Planning
- Implementation
- Control
- Adjustment
Planning
- Planning means choosing a course of action
- to plan, a manager must establish goals, identify resources, and allocate the resources to competing uses
Implementation
- One a plan is developed, it must be implemented, or set in motion
- to implement, the manager must acquire the resources needed for the plan and oversee the process. coordinating, staffing, purchasing, and supervising fit under this function
Control
- Control is the “feedback” function
- To control, the manager must monitor results, record information, compare results to a standard, and take corrective action as needed
Adjustment
If outcomes are not meeting the objectives, adjustments need to be made. Adjustment may involve fine-tuning the technology or changing enterprise. In some cases, additional information will be needed to diagnose the problem
STRATEGIC FARM MANAGEMENT
-Strategic management consists of charting the overall long-term course of business
TACTICAL MANAGEMENT
- TACTICAL MANAGEMENT consists of taking short-run actions that keep the business moving along that course until the destination is reached
Goals
- Goals should be written
- Goals should be specific
- Goals should be measurable
- Goals should have a timetable
Possible Goals (Examples)
- survive, stay in business
- maximize profits
- maintain or increase standard of living
- own land, accumulate assets
- reduce debt, become debt free
- maintain stable income
- pass farm to next generation
- increase free time
- increase farm size (“growth”)
- maintain or improve environmental quality
- own and manage my own business
Prioritizing goals
- Goals may change with age, financial condition, family status, and experience
- Long-run goals may differ from short-run goals
- Profit maximizing is often assumed to be the primary goal of all businesses
- However, farm operators often rank survival as most important
- Reducing risk may conflict with maximizing profit
- Other goals may also affect profit maximization
Assessing Resources
- Physical resources: land, buildings, fences, breeding livestock, machinery and equipment, established perennial crops
- Human resources: skills of the operator and other employees, likes and dislikes of individuals
- Financial resources: cash, other capital and available credit
Surveying the business environment
- Called “external scanning”
- The major types of crops produced haven’t changed much, but their characteristics are changing
- A change may provide an opportunity or a threat
Identifying and selecting strategies
Some businesses have more potential routes for reaching their goals than others because resources are more flexible. As the number of alternative uses for resources increases, so does the complexity of the manager’s decisions.
Implementing and Refining the selected strategies
- Manager must formulate action steps to implement the plan
- Manager must decide which information to collect to evaluate the success or failure of the plan
- Strategic management is an ongoing activity
Tactical management
- After an overall strategy has been developed, the manager must make tactical decisions.
- Such decisions include when and where to market, which rations to feed, when to trade machinery, and whom to hire
- Small decisions, such as what field to till on a given day, are also part of tactical management
Decision Making Step 1
- Identify and define the problem or opportunity
Decision making step 2
- Identify alternative solution
Decision Making Step 3
- Collect data and information
Decision making step 4
- Analyze the alternatives and choose one
Decision making Step 5
- Implement the decision
Decision Making Step 6
- Monitor and evaluate results
Decision making Step 7
- Accept responsibility for the decision
Characteristics of decisions
- Importance
- Frequency
- Imminence
- Revocability
- Number of alternatives
The decision making alternatives
- Fixed supply of land: Land base is essentially fixed, making decisions about land use, sale, or acquisition is critical
- Biological processes and weather: Laws of nature place limits on manager’s decisions
- Small size: Often one person serves as management and labor
- Perfect competition: producers are price takers
Purpose and Use of records
- Measure profit and assess financial condition
- Provide data for business analysis
- Assist in obtaining loans
- Measure the profitability of individual enterprises
- Assist in the analysis of new investments
- Prepare income tax returns
Measure profit and asses financial condition
- These are among the most important reasons for keeping records
- Profit is estimated by developing an income statement
- The financial condition is shown on the balance sheet
Provide data for business analysis
- Use the information from the balance sheet and income statement to perform an in-depth analysis
- Analysis of past decisions is useful for making current and future decisions
Assist in obtaining loans
- Lenders require financial information about the farm business to assist them in their lending decisions
- following the farm financial difficulties during the 1980s, many agricultural lenders are requiring more and better records
- Good records increase the odds of getting a loan
Prepare Income Tax Returns
- Internal revenue Service (IRS) regulations require keeping records for tax purposes
- Tax records are often inadequate for management purposes
- Sound record-keeping can also help reduce income tax obligations
Farm Business Activities
- Production Activities
- Investment Activities
- Financing Activities
Production Activities
- These accounting transactions involve activities related to the production of crops and livestock
- Revenue from product sales or other farm revenue is included here, as are production expenses
Investment Activities
- These activities relate to the purchase, depreciation, and sale of long-lived assets, such as land, equipment, or breeding livestock.
- Records should include purchase date and price, annual depreciation, book value, current market value, sale date and price, and gain or loss when sold
Financing Activities
- These transactions relate to borrowing money, and paying the interest and principal on loans.
- Financing activities include money borrowed to finance new investments and money borrowed to finance production activities.
Account payable
- An expense that has been occurred and not yet paid. Typical accounts payable are for items charged at farm supply stores where the purchaser is given 30 to 90 days to pay the amount due
Account receivable
- Revenue for a product that has been sold or a service provided but for which no payment has yet been received.
- An example would be custom work for a neighbor who has agreed to make payment at a future time.
Accrued expense
- An expense that accrues or accumulates daily, but which has not yet been paid.
- Examples are interest on loans and property taxes.
Asset
- An item of value, tangible or financial.
- examples would include machinery, land, bank accounts, buildings, grain, and livestock
Credit
- An accounting entry in the right-hand side of a double-entry ledger.
- A credit entry records a decrease in the value of an asset.
- It records an increase in liability, owner equity, or an income account
Debit
- An accounting entry in the left-hand side of a double-entry ledger.
- A debit entry records an increase in an asset or expense account
- It records a decrease in liability or owner equity
Expense
- A cost or expenditure incurred in the production of revenue
Inventory
- The physical quantity and financial value of products produced for sale that have not yet been sold.
Liability
- A debt or other financial obligation that must be paid at some point in the future.
Net farm income
- Revenue - (minus) expenses
- The same as profit
Owner equity
- The difference between business assets and business liabilities.
- It represents the net value of the business to the owner(s) of the business
- Also called “net worth”
- business assets - (minus) business liabilities
Prepaid expense
- A payment made for a product or service in an accounting period before the one in which it will be used to produce revenue
Profit
- Revenue - (minus) expenses
- the same as net farm income
Revenue
- The value of products and services produced by a business during an accounting period.
- Revenue may be either cash or noncash.
Options in choosing an Accounting System
- What accounting period should be used?
- Should it be cash or accrual?
- Should it be single or double entry?
- Should it be basic or complete?
Accounting Period
- A period of time used to summarize revenue and expenses and estimate profit. It can be either a calendar year or a fiscal year.
- It is generally recommended that a firm’s accounting period follow the production cycle of the major enterprises.
Single entry
- With single-entry, only one entry is made for each transaction
Double entry
- A double-entry system records changes in values of assets and liabilities as well as revenue and expenses.
- In double-entry, there are equal and off-setting entries for every transaction.
- Double-entry accounting requires more effort, but it is also more accurate.
Basic accounting method
- The most basic accounting system is one that is very simple and uses cash accounting
Complete accounting method
- A complete system would be computerized with capabilities for both cash and accrual accounting, and with the ability to track inventories, loans, and depreciation, and to handle payroll accounting and perform enterprise analysis
- Between the basic and complete methods there are many possibilities
How complete?
- How much accounting knowledge does the user have?
- How large and complex is the farm?
- How much and what kind of information is needed or desired for management decision making?
Cash Accounting: revenue
Recorded when and only when cash is received for sale of product or service
Cash accounting: Expenses
Recorded when they are paid, even if that is not when the item is bought or used to produce a product
Cash accounting : Advantages
simple and easy-to-use
Cash accounting: Disadvantages
recorded revenues and expenses may not be accurate reflections of activities during the accounting period
Accrual accounting: Revenue
recorded when the item is produced, regardless of when sold
Accrual accounting: expenses
“matched” to revenue; recorded when used to produce
Accrual accounting: advantage
accurate
Accrual accounting: disadvanatge
requires more time and knowledge than the cash system
Farm financial standards council recommendations
- accrual-based system recommended, but cash system accepted, with end-of-year adjustments
chart of accounts
- lists and organizes all accounts used by the accounting system
- includes broad categories and sub-accounts
- each account assigned a number
- can coordinate account names to match schedule f for tax purposes
output from accounting system:balance sheet
- report that shows the financial condition of the farm at a point in time
output from accounting system: income statement
- report of revenue and expenses over the accounting period
output from accounting system
other reports depending on complexity of system
purpose and use of a balance sheet
- systematic organization of everything “owned” and “owed”
- assets equal liabilities plus owner equity
- owner equity equals assets minus liabilities
- can complete at any time, but most prepared at end of accounting period
- provides measures of solvency and liquidity
solvency
= ability to pay off debt in the long run
- solvency measures the liabilities of the business relative to the amount of owner equity invested in the business
- it provides an indication of the ability to pay off all financial obligations or liabilities if all assets were sold
- IF ASSETS ARE NOT GREATER THAN LIABILITIES, THE BUSINESS IS INSOLVENT
= if it is liquid, it can withstand being insolvent for a little while
liquidity
- liquidity measures the ability of the business to meet financial obligations as they come due without disrupting the normal operations of the business
- liquidity measures the ability to generate cash needed to pay obligations
- liquidity is generally measured over the next accounting period and is a short-run concept
balance sheet formal
- assets are shown on left or top
- liabilities are shown on right or below assets
- owner equity shown on balance sheet and liabilities plus owner equity equals assets
Assets
- an asset has value for one of two reasons
- it can be sold to generate cash, or
- it can be used to produce other goods that in turn can be sold for cash in the future
liquid assets
-assets that can be sold easily to generate cash are liquid assets
current assets
- the more liquid assets the be separated from other assets on the balance sheet.
- current assets include: cash, marketable stocks and bonds, accounts receivable, and inventories of feed, grain, supplies and feeder livestock
hedging gain and loss
- if there is hedging gain or loss, it is shown under the current asset section
- for example, if the farmer sold 10,000 bushels of corn in the futures market for $3.50 per bushel and the current futures is $3.40, a gain of $1,000 would be reported.
noncurrent assets
- assets that are not current assets are classified as noncurrent assets. They are more difficult to sell and/or their sale would be more likely to disrupt the business.
- noncurrent assets include: machinery, equipment, breeding livestock, buildings, and land
liabilities
- a liability is an obligation or debt owed to someone else
- it represents an outsider’s claim on the business
current liabilities
- accounting principles require that current liabilities be separated from other liabilities on the balance sheet
- current liabilities are financial obligations that will become due and payable within one year from the date on the balance sheet
- examples: accounts payable, principal and accrued interest on short-term loans, and principal due within one year on longer term loans
noncurrent liabilities
- any liability that is not current is classified as a noncurrent liability
- these financial obligations will become due and payable some time after one year from the date on the balance sheet
owner equity
- if all assets were to be sold and all debts paid on the date of the balance sheet, the owner’s equity would be the amount left over
owner equity changes when:
- the business has a profit or loss
- the owner invests more capital from outside the business or withdraws money from the business
- assets change value
owner equity does not change when:
cash is used to buy other assets or a loan is taken out to purchase an assets or a loan is taken out to purchase an asset with value equal to the loan
alternative format
- current assets and liabilities are defined in the same way as previously
- intermediate assets are expected to have a life of 1 to 10 years and intermediate liabilities are due and payable after 1 year but before 10 years
- fixed assets have a useful life of more than 10 years and long-term liabilities are due after 10 years
= useful for when land prices are volatile
market value
fair market prices less any transactions cost (for items normally sold)
cost
for purchased items that do not normally lose value
= inputs in production process
lower of cost or market
conservative method
farm production cost
accumulated cost of producing the item (immature crops growing in fields, livestock)
cost less accumulated depreciation
book value, for items that depreciate
cost-basis balance sheet
has all assets valued following the cost, cost less depreciation (items that depreciate, or farm production cost methods. The one exception would be inventories of grain and market livestock, which are valued on the market basis
market-basis balance sheet
has all assets valued at market value less estimated selling costs, with the only exception being growing crops (which have no market value), which are valued at cost of production
cost-basis valuation of raised breeding livestock
-the ffsc recommends either the “full-cost absorption” method or the “base value” approach
full-cost absorption
all the costs of raising breeding livestock are accumulated over time until the animal reaches its current status (e.g. brood cow)
base value method
the producer uses a specific value that remains relatively fixed over time so that changes in the value of breeding stock reflect changes in the number of assets