Quiz 2 Flashcards
1
Q
Is depreciation a cash expense or a non-cash expense?
A
Non-cash expense
2
Q
What is the equation for Accounting Profit?
A
Profit (Loss) = Revenue - Expenses
3
Q
Is interest (capital invested in farm assets) a cash expense or a non-cash expense?
A
Non-cash expense
4
Q
Is interest (borrowed capital) a cash expense or a non-cash expense?
A
Cash expense
5
Q
Is value of operator labour a cash expense or a non-cash expense?
A
Non-cash expense
6
Q
What is the equation for Economic Profit?
A
Economic Profit = Net Farm Revenue - Opportunity cost of labour, management, capital (assets)
Economic Profit starts with Revenue - Expenses = Profit, but considers alternative uses for resources.
7
Q
Are wages for hired labour a cash expense or a non-cash expense?
A
Cash expense
8
Q
Which will always be lower: Accounting Profit or Economic Profit?
A
Economic Profit
9
Q
Is farm-raised feed a cash expense or a non-cash expense?
A
Non-cash expense
10
Q
What are the three types of costs?
A
- Opportunity Costs
- Cash or Non-Cash
- Fixed or Variable
11
Q
Is purchased feed a cash expense or a non-cash expense?
A
Cash expense
12
Q
Is owned land a cash expense or a non-cash expense?
A
Non-cash expense
13
Q
Is cash rented land a cash expense or a non-cash expense?
A
Cash expense
14
Q
Is seed, fertilizer, fuel and repairs a cash expense or a non-cash expense?
A
Cash expense
15
Q
What is Opportunity Costs?
A
Defined in one of two ways:
- Income that could have been earned by selling or renting input.
- Income resource could have earned/generated in its most profitable alternative use.
16
Q
Is property taxes and insurance a cash expense or a non-cash expense?
A
Cash expense
17
Q
What is Unpaid Labour?
A
-Opportunity cost is what could be earned in next best option
- Employment on another farm or ranch?
- Non- farm employment options?
- Not uncommon for a producer to say their time is ‘free’
18
Q
What is Unpaid Management?
A
- Value of making and implement decisions
- Difficult to estimate - %gross income, farm manager fee
- Often combined with unpaid labour
19
Q
What is Opportunity Cost of Equity Capital?
A
Risk-return tradeoff - “better” uses of capital (higher expected returns) may have higher degree of risk
Therefore, opportunity cost of equity capital often set to:
- interest rate on savings account or GIC
(Guaranteed Investment Certificate)
- or current interest rate on borrowed capital
20
Q
What is a short-run business?
A
period during which quantity of at least one input is fixed.
Current crop production cycle is short run as land quantity is fixed.
Not a defined period of time, but typically one crop or livestock production year.
21
Q
What is a long-run business?
A
Period during which quantity of all inputs can change.
In long-run, all inputs can be bought or sold.
22
Q
What is Opportunity Cost of Farm Long-lived Assets?
A
- Land and machinery, can use rental rates for opportunity cost, but for others (ex. fences) use the most profitable alternative for the capital invested in them.
- Depreciating assets - need to adjust their opportunity cost each year
23
Q
What is Cash Expenses?
A
- Actual transfer of cash occurs
- Can be fixed or variable
- Fixed (e.g. property taxes)
- Variable (e.g. fertilizer, fuel, feed)
24
Q
What Non-Cash Expenses?
A
- No cash outlay
- Depreciation & opportunity costs (unpaid labour, interest on own capital, homegrown feed)
- Can be fixed or variable
- Fixed (e.g. depreciation)
- Variable (e.g. homegrown feed)
25
What are Fixed Costs (Overhead Costs)?
Fixed costs incurred whether or not production takes place.
Examples: Depreciation, insurance, property taxes, interest on debt, interest on equity capital (ex. Ownership costs)
- Only exist in short-run
- Total fixed costs do not change as level or production changes
26
What is fixed cost (overhead costs)? Give examples.
Fixed costs incurred regardless of the level of production. They only exist in short-run, in long-run nothing is a fixed cost, as assets can be sold.
Different assets have different types of fixed costs.
Example: At beginning of seeding, too late to increase the amount of cropland owned or rented therefore it's a fixed cost.
27
What is the equation for Average Fixed Costs?
Average Fixed Costs = Total Fixed Costs (TFC) / Output
- Total Fixed Costs remain fixed (by definition), but as output increases, Average Fixed Cost will decline.
- Output measured in physical units (per acre, per cow, etc.)
May be increasing, constant, or decreasing depending on underlying production function.
28
Total fixed costs (TFC) are the sum of several costs. List what the DIRTI five are.
Depreciation
Interest
Repairs (and shelter)
Taxes
Insurance
29
Do accountants and tax authorities consider principal payments or interest payments on loans a cost of doing business?
Interest payments
30
Which one of these can be both fixed and variable and which one can be neither fixed or variable: Loan principal payments or interest payments?
Principal Payments - neither
Interest Payments - both
31
What is fixed cost depreciation and what is the equation?
Loss of value from use, age or obsolescence.
Formula for average yearly loss of value over lifetime of asset.
Depreciation = (Purchase price - Salvage value) / Useful life
32
What are Variable Costs (Direct Costs)?
- Directly related to the amount of production, manage controls.
- No variable costs if no production in short-run
- Variable costs exist in short-run and long-run
Examples: Seed, Fertilizer, Herbicide, Repairs,
Fuel, Feed, Vaccines
- In long-run, all costs are variable costs
Examples: Fertilizer or feed are variable costs, but
once purchased, become fixed costs for rest of
production cycle.
Examples: Labour or cash rent are also fixed
costs during the contract period
33
What is the equation for Variable Cost?
Variable Cost = (Quantity of input x Price of input)
34
What is fixed cost interest?
Interest on capital invested in an asset.
This is an opportunity (noncash) cost if you own it, or a cash cost if paying a loan, or a combination of the two.
Since value of depreciable asset decreases each year, invested equity in the asset also decreases yearly.
This decrease in value is taken into account in calculating this fixed cost.
35
what is the formula to estimate interest for average value of depreciating asset over its useful life?
Interest = Average asset value x Interest rate
Average asset value = (Initial cost + Salvage cost) / 2
36
What is the formula to estimate interest cost for current year?
Interest = Current asset value x Interest rate
37
What is the equation for Total Cost?
TC = TFC + TVC
Total Cost is sum of fixed and variable costs.
38
What is the equation for Average Total Cost?
Average Total Cost = TC/output
OR
Average Total Cost = AFC + AVC
39
What is the equation for Marginal Cost?
Marginal Cost = ΔTC / Δ output
OR
Marginal Cost = ΔTVC / Δ output
40
What are repairs of fixed cost?
Repairs (actually machinery shelter)
-Repairs are partly fixed, partly variable
-Machinery housing to maintain more asset value
Taxes
-$ amount found in records
Insurance
-Actual $ amount applicable to item
Except for land taxes, these costs are much smaller in general.
Total Fixed Costs are often 10-15% of the purchase price for farm machinery.
41
What is Average fixed cost? Give the equation and an example.
Average fixed cost = Total fixed costs / Output
Dividing TFC by a unit of output, (bushel, hundredweight) or acres, hours for machinery gives an Average Fixed Cost.
Example: Combine cost/acre, Dairy housing cost/cwt milk.
Total Fixed costs remain fixed (by definition), but as output increases, Average Fixed Cost is spread out and will decline.
With equipment, AFC calculated by dividing TFC by hours used or acres used
Acres and hours are not units of production.
42
What are variable costs (direct costs)? Give examples.
Directly related to the amount of production, manager controls.
No variable costs if no production in short-run.
Examples: Seed, Fertilizer, Herbicide, Fuel, Feed, Vaccines, Labour
43
What is an Enterprise Budget?
- A farm business management tool to project revenue, expenses & profit for a specific activity (enterprise)
- Provides a detailed physical and financial plan for growing a specific crop or raising one livestock species or class
- Base unit for crops generally $/acre
- Base unit for livestock generally $/cwt, /head or per typical size operation
44
What is total variable costs? Give examples.
A cost that varies with the level of output.
Total variable costs: sum of all variable costs
Variable cost = (Quantity of input x Price of input)
Ex. # vaccines x $ cost/vaccine; lbs. seed x $ cost seed/lb
45
What is average variable costs? Give examples.
Average variable costs : TVC / output (hours, acres for machinery)
Output measured in physical units (vet costs / cwt milk, fertilizer cost/ bu. wheat harvested).
AVC may be increasing, constant or decreasing as output increases depending on underlying production function
46
What is Enterprise Budgeting and Analysis used for?
- calculating break-even price and break-even yield
- develop cash flow budgets and whole-farm plans
It is best to use own production and financial data whenever possible
Provinces or other ag organizations compile data that can also be used or modified
47
Where do variable costs exist? Give an example.
Variable costs exist in short-run and long-run.
Ex. Fertilizer or feed are variable costs, but once purchased, the costs are fixed for rest of production cycle.
48
What is the equation for cost of production?
Cost of production = Total fixed costs + Total variable costs
49
How are enterprise budgets an example of economic budgeting?
- Include cash costs and opportunity costs
- Typically, these opportunity costs are for operator labour and for capital invested in machinery, buildings and land.
- The profit or return shown is thus an economic profit.
50
What is included in constructing an enterprise budget?
- Gross Revenue: cash (from crop or livestock sales) and non-cash revenue (homegrown feed)
- Variable Costs: expenses specific to production of the commodity, only incurred if production occurs (operating, direct costs)
- Gross Margin: gross revenue less Variable Costs (return over variable expenses, income above operating expenses )
- Fixed Costs: expenses that do not vary with production, result from ownership of assets (ownership, indirect, overhead costs)
- Estimated Profit/Returns: return to management if opportunity costs included (return over total expenses, return to management)
51
What are examples of Operating or Variable Costs?
- Seed, fertilizer, lime, pesticides: Quantity of input to be used x input price
- Machinery variable costs: fuel, oil, lubricants, and repairs.
- Fuel consumption - estimated in various
ways, simple or complex
- Lubricants and filters ~10-15% of fuel
- Repairs - % of purchase price; actual records
for each machine
- Need to allocate to specific enterprise when
machinery shared
- Labour: Cash (paid labour) and/or opportunity cost for unpaid labour
- Hauling and drying: depends on yield, moisture
- Crop insurance: insurance premium
- Interest: for capital tied up by operating expenses
52
How do you calculate profit?
Profit = (P x Q) - (VC x Q) - FC
(P x Q) = Revenue
(VC x Q) = Variable costs
FC = Fixed cost
P = The market price per unit of the commodity
Q = The number of marketable units produced
VC = The variable cost per unit produced
FC = Represents the fixed costs
Profit = Revenue - Expenses
53
Example of Interest Calculation for Operating Cost:
$100,000 needed for operating expenses to produce 500 acres of flax.
Operating loan: $80,000 for 6 months @ 7% interest
Opportunity cost of equity capital: $20,000 for 6 months 2% GIC rate
Total interest (interest assumed 6 months on all operating costs)
Per acre cost
Operating loan: $80,000 x 0.07 x 6/12 = $2,800
Opportunity cost of equity capital: $20,000 x 0.02 x 6/12 = $200
Total interest: $3000
Per acre cost: $3000/500 acres = $6 interest cost/acre
54
What are production decisions in short run?
In short run, when expected selling Price > minimum Average Total Costs, maximize profit where Marginal Revenue = Marginal Costs.
In short run, when expected selling Price < minimum Average Total Costs, continue production at level which reduce losses the most.
In short run, production should pause when selling Price < minimum Average Variable Costs.
Note: Expected selling prices may not be actual selling prices.
55
What are production costs in long run?
If selling price is expected to continually be less than minimum Average Total Costs, there will be continual loss.
56
What is short-run production?
Revenue must cover variable costs.
57
What is long-run production?
All costs need to be covered.
58
What does it mean if your gross margin is negative? What does it mean if it's positive?
Negative: Enterprise should not be produced
Positive: gross margin shows how much an acre of this crop enterprise or head of livestock will contribute toward payment of fixed costs
59
Why do farms grow?
Because they can.
Transition -> make room for next generation.
Peers, friends, neighbours.
Lower unit cost of production.
Efficiency gains.
60
What is Ownership (Fixed Costs)?
Since many fixed assets are used in more than one enterprise, need to allocate fixed costs between the enterprises which use them.
- Machinery depreciation: compute average annual depreciation (straight line) then convert to per acre or per hour value and then prorate to specific enterprise based on its use.
- Machinery interest: interest rate x average value of asset; total cost needs to be allocated to each enterprise
- Land charge: actual cash rent or opportunity cost of land ownership; typically cash rental rate used even if land owned
- Miscellaneous Overhead: expenses not directly associated with a single enterprise; allocate share of pickup truck expenses, liability insurance, shop expenses, legal expenses, etc
61
Why should you get better, before getting bigger?
Be as financially efficient as you can before growing.
If financial stress exists -> adding acres or cows likely won’t fix things.
62
What does it mean if management charge is not in budget? What does it mean if it is in budget?
- If management charge (opportunity cost) not in budget, estimated profit is return to management
- When management charge is in budget, positive estimated profit means revenue covers all costs to produce commodity, including opportunity costs of land, labour and capital
63
Why should you grow the farm?
Reduce production costs per unit of product.
Improve profit margins.
Improve asset utilization.
Transition/Add New Family Members.
Invest Retained Earnings.
64
What are the four ways of estimating enterprise costs?
1. Direct Costing
2. Allocating Whole-Farm Expenses
3. Market Value
4. Formula-Based
65
What is the Economies of size theory?
As farm/ranch size increases, cost per unit of output could be decreasing, constant or increasing.
If avg costs per unit decreasing -> incentive to get bigger to achieve economies of size.
66
What is Allocating Whole-Farm Expenses?
- Shared expenses such as utilities, subscriptions, office expenses, legal/accounting, insurance, property taxes, small tools
a)Percent of Gross Margin recommended
approach
- If commodity accounts for 25% of Whole
Farm Gross Margin, allocate 25% of
shared overhead expense
b) Other approaches - split equally, % of gross
revenues, % of total expenses, % of acres, #
of hours used in enterprise
67
What is Direct Costing?
Detailed records tracking actual amounts, best for direct variable costs
68
What is Formula-Based?
Etimating costs using percentages or formula
- e.g. Capital Recovery Charge, % Purchase Price
(PP) for Insurance & Housing, Repairs
69
What are reasons for economies of size?
-Spread fixed costs over more units of production.
-Technology investment -> high investment cost needs to be spread over larger acres or head.
-Engineering economics -> capacity increases more than purchase price -> lower fixed costs per unit of capacity.
-Specialized resources -> larger farms can make full-use of specialized equipment, can specialize in labour.
-Lower input prices -> price discounts with bulk purchase.
-Higher output prices -> price premium with larger volumes.
-Management -> double farm size, doesn’t double time required.
70
What are reasons for diseconomies of size?
-Management -> as farm/ranch grows, difficult to be knowledgeable about all aspects of all enterprises; multiple managers will face difficulty reaching agreement on decisions; timeliness issues can emerge.
-Labour Supervision -> as farm/ranch grows, additional labour required which requires supervision and travel time.
-Geographic Dispersion -> time and expense to monitor, move labour and equipment between sites.
-Biohazards -> intensive livestock operations have additional regulations to be followed for manure, deadstock, etc.
71
Name an example of each Direct Cost, Allocate Whole Farm Expenses, Market Value, Formula-Based?
Direct: Seed, Feeder cattle, Prepared feed, salt, mineral, Fertilizer, Pesticide, herbicide, Custom feeding, Insurance premiums (crop, livestock), Vet, medicine, breeding fees, Other crop and livestock supplies
Allocate Whole Farm Expenses: Motor vehicle expenses, Small tools, Containers, twine, Soil testing, Office expenses, Legal & accounting, Memberships, Licenses, permits, Motor vehicle interest and leasing costs, Utilities, Other insurance premiums, Property taxes
Market Value: Labour, Custom Work, Freight and shipping, Commissions and levies, Storage/drying, Rent (land, pasture, buildings), Machinery lease/rental
Formula-Based: Machinery (fuel/oil), Building and fence repairs, Depreciation (buildings and machinery), Interest (operating), Interest (real estate, mortgage, term loans)
72
What does a long-run average cost curve look like?
It is a L-shaped costs are high when size is small. then costs decrease as size increases.
73
What are things you need to consider while enterprise budgeting?
- Many different input combinations - no single budget for an enterprise
- Many budgets available - all look slightly different, but have same underlying components
- Use caution with third-party budgets - may not reflect your farm/ranch conditions
- Past records or provincial data can provide information for enterprise budgets
- Price is an estimate and can become outdated quickly
- Economic enterprise budgets include opportunity costs for labour, land and capital
74
How do you interpret enterprise budget?
- An economic enterprise budget includes opportunity costs on labour, capital, land and maybe management as expenses.
- Result is economic profit. If 0, not so bad. All assets are earning their opportunity costs.
- Accounting profit would give the revenue remaining to pay management, unpaid labour and equity capital for their use.
75
What is equation for Cost of Production?
COP = Total Costs / Expected Yield
76
What are some assumptions made when planning a crop?
Crop prices
Estimated crop yields
Seeding rates
Seeding costs
Fertilizer
Plant protection
Machinery operating costs
Custom work/Hired labour
Crop insurance premiums
Utilities
Interest on variable expenses
Building repairs
Business overhead
Machinery deprecation
Building depreciation
Machinery investment interest cost
Building investment interest cost
Land investment interest cost
Labour and Management
77
What is the equation for Breakeven Price?
Breakeven Price = Total Cost / Expected Yield
Breakeven price - output price needed to just cover all costs at a given output level.
78
What is the equation for Breakeven Yield?
Breakeven Yield bu/ac = (Total Cost $/ac) / (Expected Price $/bu)
Breakeven yield - output yield needed to just cover all costs at a given price.
79
If the total cost: $220 per ac
Expected yield: 740 bu/ac
Expected price: $0.28/bu
What is the Breakeven Price?
Breakeven Price = Total Cost / Expected Yield
= $220 / 740 = $0.30/bu
80
If the total cost: $220 per ac
Expected price: $0.28
Expected yield: 740 bu
What is the Breakeven Yield?
Breakeven Yield = Total Cost / Expected Price
= $220 / 0.28 = 786 bu
81
What is the equation for breakeven price per unit of production?
Breakeven price per unit of production = (Variable costs + Fixed costs) / Total Lbs. weaned
82
Your production costs for yellow pea are $375/acre. Your expected yield is 30 bu/ac. Your expected selling price is $12/acre. What is your break even yield?
Breakeven Yield = Total Cost / Expected Price
= $375 / 12 = 31.25 bu
83
Your production costs for yellow pea are $375/acre. Your expected yield is 30 bu/ac. Your expected selling price is $12/acre. What is your break even price?
Breakeven Price = Total Cost / Expected Yield
= $375 / 30 = $12.5 /bu
84
What are the 6 steps to whole farm budgeting?
1. Determine objectives and specify goals.
2. Inventory available resources.
- Land, buildings, machinery, labour, management
3. Identify possible enterprises and technical coefficients.
-Technical coefficient: how much of a resource is required to produce one unit -> use to determine enterprise size, combination.
4. Estimate gross margins per unit for each possible enterprise.
5. Choose the best combination of enterprises.
6. prepare a whole-farm budget
85
Interest is included as a variable cost on an enterprise budget...
A) only if money will be borrowed
B) because of the investment in machinery
C) because capital will be tied up in variable
costs until revenue is received
D) because of the investment in land
C) because capital will be tied up in variable
costs until revenue is received
86
Cost of production will be the same value as...
A) average total cost
B) total cost
C) average variable cost
D) marginal cost
A) average total cost
87
Ownership or fixed costs for farm include all of the following except...
A) interest on the investment
B) utilities
C) depreciation
D) insurance
B) utilities
88
A crop enterprise budget containing all economic costs would include an entry for...
A) fertilizer and seed
B) depreciation
C) opportunity cost on capital required
D) all of the above
D) all of the above
89
The purpose of completing a whole farm budget is to...
A) evaluate the effect on profit of one
particular management change
B) compare which enterprises are most
profitable
C) project how much operating capital you
will need to borrow in each period during
the upcoming year
D) estimate the net income from all
enterprises combined
D) estimate the net income from all
enterprises combined
90
A whole farm budget contains...
A) costs, returns, and resource need for a
specific set of enterprises
B) the actual costs and returns that were
realized during one year for all the
enterprises on a farm
C) projected costs and returns for one unit
of a specific enterprise
D) costs and returns that would be affected
by a specific management change
A) costs, returns, and resource need for a
specific set of enterprises
91
What is the purpose and use of partial budgeting?
Tool to analyze how changes in operations would impact profits.
Simpler approach than comparing two enterprise or whole-farm budgets.
Does not account for changes in value of money over time.
Analyzes operational changes:
- Renting vs owning
- Raising replacement animals vs buying
- Using a new technology vs keeping
current
Typical first step - identify all changes resulting from adoption of proposed change
92
What are the four questions that partial budgeting asks?
1. What will new or additional costs be?
2. What current costs will be reduced or eliminated?
3. What new or additional revenue will be received?
4. What current revenue(s) will be lost or reduced?
93
What are the objectives of a partial budget?
Managers need to be clear about profitibality objectives.
- Is primary concern to increase cash flow?
- Non-cash items (depreciation, unpaid
labour, opportunity costs) do not need to
be considered
- Is primary objective economic improvement of
operation?
- Including non-cash items allows an
analysis of true profitability
94
What are the additional costs for partial budget format?
What additional costs expected with proposed change?
Additional costs can be fixed or variable.
95
What are the additional revenues for partial budget format?
What additional revenues will be earned with proposed change?
Increase production?
Increased yield?
96
What are the reduced revenues for partial budget format?
What revenues currently being received will change with the proposed change?
Lower selling price? Lower yield?
Fewer animals sold?
97
What are the reduced costs for partial budget format?
What costs will decline or disappear with proposed change?
Reduced input use?
Reduced input price?
98
Which ones are paired together for partial budgeting format: Additional Costs, Additional Revenue, Reduced Revenue, Reduced Costs.
Which one is negative and which one is positive?
Additional Costs and Reduced Revenue (Negative)
Additional Revenue and Reduced Costs (Positive)
99
What is sensitivity analysis?
Partial budgeting requires estimates of change in yield, price, costs
Accuracy of analysis depends on accuracy of estimates
Sensitivity analysis changes the values used to see impact on result
- Calculate profit change using low, average, and high yield estimates
- Calculate profit change using 10, 20, and 30% higher and lower prices
See how 'sensitive' the expected profit change is to price or yield variations - indication of risk
100
What are the partial budgeting pitfalls?
Must have good data
Cost (and sometimes revenue) changes are not always proportional because or economies and diseconomies of size
Opportunity costs for capital and labour should be included, but especially when changes would be large
101
What are the partial budgeting limitations?
Can only compare present situation with one alternative at a time - if multiple alternatives, need multiple budgets
Assumes constant expected average annual changes in revenue and expenses
If large capital investment required and/or varying cashflows - best to use capital investment analysis
102
True or false: When summarizing a partial budget, added revenue and added costs are summed together.
False
103
True or false: Partial budgets include all costs and returns for the enterprises under consideration.
False, partial budgets only compare 2 things.
104
Which of the following are the profit increasing changes in a partial budget?
A) Additional costs and additional revenue
B) Reduced costs and reduced revenue
C) Additional costs and reduced revenue
D) Reduced costs and additional revenue
D) Reduced costs and additional revenue
105
A partial budget is designed to analyze the effect of a proposed management change on...
A) only revenue
B) only costs
C) profit
D) crop or livestock yields
C) profit
106
Evaluating the riskiness of a particular change being analyzed with a partial budget by varying one or more key values is called...
A) sensitivity analysis
B) profitability analysis
C) break-even analysis
D) partial analysis
A) sensitivity analysis
107
What is a cash flow budget and what does it include?
Summary of projected cash inflows and outflows for farm/ranch for a future period of time it is typically, monthly projections for period of 1 year.
No noncash entries are included.
Estimate amount and timing of borrowing and ability to make payments, manage liquidity.
At year end compare cash flow budget with actual cash flow statement.
108
What are the major components of a cash flow budget?
Cash inflows
Cash outflows
Cash balance = Inflows - Outflows
New borrowing required?
Loan repayment (principal and interest)
Outstanding balances for all loan types
Ending cash balance in one period is beginning balance for the next period
109
What are the sources of cash?
Beginning cash balance or cash on hand at the beginning of the period.
Farm product sales or other cash revenue from operations.
Capital asset sales.
Non-business cash receipts.
New borrowed capital or loans received.
110
What are the uses of cash?
Farm operating expenses.
Capital purchases.
Non-business expenses.
Loan payments (principal + interest).
111
What is cash flow deficit?
Operating loan or line of credit often used to bridge cash flow gaps.
-Use to cover operating expenses, not to
purchase long-term assets (equipment,
cattle).
-Repay as commodities sold -> ideally
within the year or production cycle.
Farm input suppliers may offer input loans or delayed payment.
Federal government Advance Payments Program.
-$100,000 interest-free borrowing.
112
What is the AAFC Advanced Payments program?
Available for +50 commodities (crops, forage, livestock).
Borrow up to $1M -> first $100K ($250K for ’22 & ’23) interest-free, remainder prime less 0.75%, security required.
Repay in 18 months for crop, hogs, lambs, goats.
Repay in 24 months for cattle, bison.
Advance rates are intended to reflect 50% of selling price for a given commodity.
113
What are the 10 steps to cash flow budgeting?
1. Outline whole-farm plan (Acres of each
crop, # of animals).
2. Take inventory (current assets).
3. Estimate crop production & feed
requirements for livestock.
4. Estimate cash receipts from livestock.
5. Estimate cash crop sales.
6. Estimate other cash income (custom
work, government payments, non-farm
income can be included (investments,
gifts)).
7. Estimate cash farm operating expenses
(Refer to past year values).
8. Estimate personal and non-farm cash
expenses (living expenses, income tax)
(Estimate family living withdrawals,
incorporated/partnership may exclude).
9. Estimate purchase and sales of capital
assets.
10. Scheduled principal and interest
payments on existing debt.
prepare alternative versions (Vary assumptions on yield, price, input costs, capital purchases).
114
What are cash inflows?
New loans received.
Non-farm income.
Full sale price of capital assets.
Monetary gifts and inheritances received.
115
What are cash outflows?
Principal payments on debt.
Full purchase price of capital assets.
Family living expenses/personal withdrawals (maybe on cash flow).
Income taxes.
116
What is found on income statements and not cashflow statements?
Inventory changes
Accounts receivable
Accounts payable
Depreciation
117
What are uses for cashflow budgets?
Plan borrowing and debt repayment. Identify ways to minimize borrowing.
Help establish realistic line of credit.
Plan purchases to obtain discounts.
Aid tax planning.
Monitor and control cash flows -> budget, actual, deviation.
Does not project profit -> net cash flow ≠ net farm income.
Determine financial feasibility of an investment.
118
What does cash flow and economic profit show?
Profit from budgets: overall Revenue > overall Expenses.
-Does not consider the timing of revenue
inflow and expense outflow.
A positive cash flow is required to make an enterprise financially feasible.
-Do you have the cash resources to pay
the expenses when they are due?
A positive cash flow does not always mean profit.
-Selling off capital assets for cash ≠ profit.
Cash flow budget does not substitute for enterprise budget.
119
What do you do when you have cash?
-Hold onto your cash. you may need this for operation expenses in the future.
-Evaluate income statements and verify that your cash availability also means you're generating a profit.
-Buy inputs in advance and consider forward contracting your commodities.
-Assets future expansion or purchase plans. is now the time to take on that value-added opportunity?
-Pay off more on your loans.
120
What do you do when you are short on cash?
-See where you can cut costs, reduce labour or find efficiencies. Dig into the fixed and variable costs within your operation.
-Find ways to make extra sales. Is there equipment you don't use that you can auction off? Can you rent out storage space or take on new work?
-Diversity activities to provide year-round cash flow. If your income comes in the fall, include something that produces income in the late spring.
-If your operation can't handle an interest spike, lock in your rates.
121
What is a projected cash flow statement?
Monthly or quarterly plan of cash inflows and outflows.
Determine timing and size of cash deficits or surpluses throughout the year.
-Expenses not paid evenly over the year.
-Marketing not evenly distributed over the
year either.
Use to justify loan requests (line of credit), determine repayment schedules, plan for short-term investments.
122
A primary purpose of a cash flow budget is to...
A) project how large a credit line is needed
for the coming year
B) estimate total costs of production per unit
of crops or livestock
C) minimize income taxes
D) project the farm's net income for the
coming year
A) project how large a credit line is needed
for the coming year
123
Which of the following would never appear in a farm cash flow budget?
A) Payment to be made on an operating line
of credit
B) Opportunity cost of the family's own
labout
C) Wages to be paid to hired labour
D) Cost of purchasing a new seeder
B) Opportunity cost of the family's own
labout
124
True or false: A farm business that is profitable over the long run will always have plenty of funds to meet cash obligations.
False
125
Cash flow problems can result from all of the following except...
A) purchasing new buildings, land or
equipment
B) expanding a livestock enterprise
C) paying off loans over too long a period
D) financing high nonfarm expenses from
farm income
C) paying off loans over too long a period
126
If projected net cash flow for the entire year is negative, a possible adjustment to the cash flow budget would be...
A) change the date of a major loan payment
to a different month
B) plan to sell old grain crop earlier in the
year
C) postpone new capital investments until a
future year
D) borrow more operating capital in the
spring and repay it in the fall
C) postpone new capital investments until a
future year
127
What is the difference between ricks and uncertainty?
Risks - possible outcomes and probabilities of occurring are known (or estimated).
Uncertainty - possible outcomes and probabilities of occurring are unknown.
128
List what attitudes risk depends on.
- Financial security
- Stage of life
- Health
- Family circumstances
- Business and personal goals
129
What is the right level of risk?
When you can sleep well at night.
130
True or False: Ag producers are less likely to take more risk than the general population
False
131
How do managers form expectations for future conditions?
They often use average (mean) or "expected" values for yield, input costs, output prices; however, there is no guarantee that expected outcome will be actual outcome
132
How is historic production of farm useful for managing risk?
- Provides picture of risk faced in the past
- Assess how successful past risk management has been
133
What are the three measures that help look at the expected value of yield or price?
- the most frequent value (mode)
- the "middle" value (median)
- the average value (mean)
134
What is the difference between objective probability or subjective probability?
Objective:
- observation or measurement
- data available
Subjective:
- reliance on personal beliefs, past
experience/educated guess
- vary from person to person
135
What are measures of variability?
- Range
- Standard deviation
- Coefficient of variation
136
What is the equation for range?
Range = Largest value - Smallest value
137
What is standard deviation?
- Common measure of variability
- Can estimate from sample of past actual outcomes
- Large standard deviation means greater variability of possible outcomes
- Greater likelihood that actual outcome different from expected value
138
What is the equation for coefficient of variation?
Coefficient of variation (CV) = Standard deviation / Mean or expected value
139
What is the coefficient of variation?
- Compare relative variability between alternatives
- Standardizes the variation if samples vary in scale or mean
The larger the coefficient of variation - the greater the variability
- Greater likelihood that expected value will not give you actual outcome
140
What is the main production driver in unpredictability in agriculture?
Climate
141
True or false: If flax yield has a higher calculated standard deviation than fenugreek yield, it necessarily means that flax is "riskier" to produce.
False
142
Which of the following measures of variability is best for making comparisons among the profitability of different enterprises?
A) Range
B) Standard deviation
C) Coefficient of variation
D) Average
C) Coefficient of variation
143
True or false: The best information source for production and marketing information to apply to your operations comes from expert ag economists.
False.
The best information comes from your own records.
144
True or false: When trying to predict livestock weight gain, adding the standard deviation to the mean of your observations will give a complete view of the variability in weight gain to expect.
False.
Your need to add and subtract standard deviation from your mean. You might have to do 2 standard deviations.
145
Give examples of Production/Technical Risks.
- Weather, disease, weeds, pests
- Fire, wind, theft
- Yield variability, field loss, spoilage
146
The best expected value to use for selling prices of weaned calves while preparing an enterprise budget is...
A) a weighted average using subjective
probabilities
B) a weighted average using objective
probabilities
C) a simple average using 10 years of data
D) any of the above you feel most
comfortable using
D) any of the above you feel most
comfortable using
147
Give examples of Price & Market Risks.
- Seasonal & annual price variation
- Input price variability & availability
- Market access
148
Give examples of Financial Risks.
- Interest rate fluctuations
- Debt repayment
- Working capital
149
Give examples of Legal & Social Risks.
- Rules, Regulations
- Liability
- Consumer preferences & awareness
150
Give examples of Human Resources/Personal Risks.
- Accident/Injury
- Illness, Death, Divorce, Family disputes
- Mental health
- Employees
151
What do farmers say their top three risks are in order?
1. Marketing
2. Production
3. Financial
152
Name five production risk tools and describe them.
- Use your education: incorporate recommended production practices where appropriate and monitor results
- Choose stable enterprises: flowers vs commodities, alpacas vs cattle
- Diversification on the farm: growing several crops with livestock to reduce risk (better if different crops are not susceptible to the same insects and diseases)
- Diversification off the farm: Part-time nonfarm job
- Property Insurance: insuring buildings, machinery, livestock, stored grain
- Crop insurance: insuring crops
153
What is extra production capacity risk tool?
May choose to invest in excess machinery or labour capacity to be able to catch up when needed
154
What is crop/livestock share leases rick tool?
Production and price risks shared between tenant and owner
155
What is custom farming and feeding risk tool?
Fixed cost received for services
156
What is market risk?
- Market risk comes from variability of commodity prices
- Manage must decide to produce without knowing future price
157
List five market risk tools and describe them.
- Be educated: Learn how markets function and how prices are determined
- Spreading sales: sell crop or livestock throughout the year
- Contract sales: deferred delivery contract (deliver specific quantity quantity at particular price for specified future date)
- Futures hedging: sell a commodity futures contract at a price that guarantees you some profit over costs
- Commodity Options: derived from commodity futures contract (pay a premium to buy the right, not obligation to buy or sell commodity future contract by specified future date)
158
What are the responses to financial risk?
- Maintain liquidity and solvency
- Good set of financial records
- Cash flow projections
- Manage pace of purchases & sales, family
withdrawals
- Fixed interest rate vs variable rate on loans
- Self - liquidating loan
- Hold liquid (cash, commodities) and credit reserves
159
Name the financial risk tool.
- AgriInvest (self-managed producer-government savings account)
160
Name some responses to legal/social risk.
- Appropriate business organizational structure
- Will and estate plan
- Liability insurance
- Stay current on environmental obligations, government policy
- Seek legal advice/counsel: written contracts and leases
161
Name some responses to human/personal risk.
- Life and disability insurance
- Make health and safety a priority: including adequate rest
- Cross-train, develop SOPs, involve successors in all facets of business
- Paid labour: fair compensation, benefits, training, job description
162
Which of the following strategies does NOT reduce production risk for an operation with cash crops and cattle?
A) Selling grain before harvest with a
forward contract
B) Vaccinating livestock against disease
C) Applying insecticide to your crop
D) Keeping an extra year's supply of hay in
storage
A) Selling grain before harvest with a
forward contract
163
What type of insurance protects against damage to a farm machine storage building?
A) Liability insurance
B) Property insurance
C) Life insurance
D) Multi-peril crop insurance
B) Property insurance
164
According to the recent FCC survey, which of the following sources of risk in agricultural protection was perceived as most important to cash crop and cattle producers?
A) Production risk
B) Marketing risk
C) Financial risk
D) Legal risk
E) Human resource risk
B) Marketing risk
165
True or false: For cash crop farmers in Saskatchewan, crop diversification is one of the most effective tools to reduce production risk.
False
166
What makes the Agrilnvest program attractive to many Canadian ag producers?
A) The matching government contribution of
1% on your deposits
B) The flexibility to place your money in an
institution of your choice
C) The ability to withdraw funds when
needed
D) All of the above
D) All of the above
167
What is a farm?
CRA definition and case by case
Tax regulations similar to self-employed businesses with important exceptions.
Activities, revenue, comparisons (to farms nearby and similar in size), investments, plans to expand?
You can't just buy some property and a cow and say you have a farm.
168
What tax advantages do farmers have?
Cash accounting
-Play around when you buy and sell things
Higher Capital Gain Exemption
-Non-farm businesses have exemption of 800,000 where farms have exemption of 1,000,000, gains you make with your capital assets
Intergenerational Qualified Farm Property transfer
-Can be done tax free
169
What province has the highest % of sole proprietorship and least amount of partnerships?
Saskatchewan
170
List the 3 types of farm business structures.
Sole proprietorship
Partnership
Corporation
171
What is the sole proprietorship legal aspects?
Legally you have to do nothing to be a sole proprietorship, you just have to start your operation and register your name.
Liabilities of the whole farming operation is dependent on the person.
Make sure you have really good liability insurance.
There is some restriction on farmland in SK.
-You need to be Canadian or have a permanent residence to have farmland over 10 acres.
172
How does sole proprietorship deal with taxes?
Income taxes are considered personal income.
Profit from the farm is added to any other income you are getting from other sources.
Tax rate will be whatever your personal tax rate is.
172
Sole proprietorship business operations.
Owner's role -> makes all decisions and gets all of the profit
There is no limit to how big you can make your business.
173
Sole proprietorship advantages
Simplicity and autonomy.
Don't need lawyers.
Don't need to file a bunch of papers, only have 1 income form to fill out.
No expenses to set it up.
Freedom to do what you want.
There are no penalties if you mix farm income with personal income.
174
Sole proprietorship disadvantages
Liability is unlimited.
- you have no protection against creditors, they can seize both personal and business assets.
Limits to growth.
-You cannot bring in other people
Higher tax rate
-Depends on the situation
175
What is the partnership legal aspects?
Not a legal entity, an agreement
Can have 2 or more partners (must be over 18)
Liability -> all partners are equally responsible for everything and personally responsible for everything
Share all the profits
176
Partnership tax considerations
Income Tax- partnership not a taxable person
Each person has their own personal tax returns, need to figure out how to split up profit.
177
Partnership business operations
Flexibility is possible
Partner can sell assets (land) without other partner's consent
Can have assets in your own name and rent to partnership
Partnership agreements:
-Contributions, profit and loss allocation
-Rights and responsibilities
-Decision-making, dispute resolution
-Partnership bank accounts
-Can new partners may be added? How?
-Who will do the paperwork?
-Termination of partnership
178
Partnership advantages
Increased assets, skills, shared management
Access more credit
Flexibility to bring in next generation
179
Partnership disadvantages
Unlimited liability of general partners
-You are only liable for the business debts of the other party, not their personal debts. But if the partnership has debts your personal assets can be claimed by the creditors
No continuity
-Partnership dissolves if someone dies
Potential for disagreement
180
What is the corporation legal aspects?
Legal organization
-Need lots of paperwork
-Need a name for corporation
Need to talk about nature of the business (but don't be too specific)
Articles of Incorporation need to be filed
“Constitution of corporation” governs structure and manner in which the corporation operates
181
What is a corporation and what happens with taxes?
Independent organization
-Can be private or public
Assets and liabilities belong to the corporation
Separate entity (legal person)
-Can own property
-Can borrow money
-Can enter into contracts
-Can sue and be sued
Files its own income tax return
-Can have lower tax rates
182
What is the corporation business breakdown?
Shareholders
-Owners
How much equity you contributed gives you % of shares
Directors
-Voted in by shareholders
-Need to be 18+ and not bankrupt
-Does not need to be a shareholder
-Can be as many people as you want
-Set general policies and conduct business affairs
Officers
-Elected/removed by directors
-Can be made up of whatever you want (president, secretary etc.)
-Does not need to be shareholders or directors
-Responsible for daily operations of the business (hire/fire people, sign contracts, borrow up to a certain amount of money)
-Need approval from directors for big things
(For a farm/ranch corporation, often all the same individuals)
183
How are corporation shares split up and what are the types of shares ?
Number of shares and initial value of shares is determined by how much equity you put into the business
Types of shares
-Common shares
-Value increases as corporation grows
-Can get dividends
-Voting shares
-If business gets dissolved, they can get
some property
-Preferred shares
-Value does not increase as corporation
grows
-Do not vote
-Get money before common shares
-Receive fixed dividends
184
Corporation advantages
Limit liability to shareholders
-Shareholders personal assets are protected
More resources, credit access
Continuity, Transition
-Corporation does not disappear if someone dies
-Can transfer shares
Taxes
-Have a lower tax rate
185
Corporation disadvantages
Costly
-Costs money to set up and maintain
Meetings, reports required
Must manage withdrawals for tax benefit
186
What is the most common business structure in the Canadian Prairie provinces?
A) Sole proprietorship
B) Partnership
C) Corporation
A) Sole proprietorship
187
The number of shares received by each shareholder at the time of incorporation for a ranch or farm is based on the ______ contributed by each shareholder.
A) Value of equity capital
B) Value of liabilities
C) Amount of labour
D) Managerial experience
A) Value of equity capital
188
Which of the following are special tax benefits available to ranchers and farmers in Canada?
A) Can use cash accounting when filing
income tax returns
B) Higher capital gain exemption than other
taxpayers
C) Intergenerational farm property can be
transferred tax-free
D) All of the above
E) None of the above
D) All of the above
