Farm Management essay 1500 words

ARE 140 Farm Management

Lecture 11.1

Tuesday, February 11, 2020

Management Control

Hypothetical returns to management per farm: what is going on?

Gross Sales Net income low third of group

Average net income

Net income of high t third of group

High Third NFIR

$500,0000 $-220,005 $-80,192 $60,661 .0.121

$1,000,000 $-250,087 $-40,693 $130,344 0.130

$2,000,000 $-230,744 $10,260 $270,894 0.135

$5,000,000 $-$630,647 $20,701 $700,200 0.140

Management Functions

● Conceived as 3 Functions: ● Planning ● Implementation ● Control

● Conceived as 5 Functions: ● Planning ● Organizing ● Staffing ● Directing & coordinating ● Controlling

Flow action in management functions

1. Planning

● Planning means choosing a course of action ● To plan a manager establishes goals, identifies

resources, and allocates the resources to selected uses

● Develop an overall plan for the long run, intermediate run, and the current year

2. Implementation

● Once a plan is developed and agreed upon, it is implemented or set in motion

● To implement the manager assembles all the necessary resources needed for the plan and organizes the process

● Staffing and coordinating are part of the implementation function

3. Control: the feed-back function in three steps

2. Measure against standard(s) 1. Establish standards for comparing results

3. Take corrective action to improve performance as needed

1. Establishing standards of control

● Need to understand the business ● Establish standards in context of the whole farm ● but also be specific: establish standards for

each enterprise as needed – Standards in financial management – Standards in agronomic management

1. Establishing standards of control

Financial Standards: ● Budget reviews ● Financial ratios and

evaluations such as NFIR, ROI, Debt/Asset Ratio

Physical Standards: ● Agronomic,

horticultural, livestock performance

2. Measures of Physical Standards

● Crop systems – Yields, e.g. tons per acre – Quality grade – timing of activities

● system performance – amount of time – efficiencies and effect on

and interaction with other systems and enterprises

● Livestock systems – Efficient use of pastures

(AUMs) – Average daily gain in

livestock: feed analysis – Calving or lambing %, or

pigs weaned per sow – Milk production per cow

or doe – Eggs per hen

Example of control function in almond crop ● The Problem: You own and operate a 100-acre almond orchard in Yolo

County that is 10 years old. Soil is class II Capay clay. The County average yield is 2,000 lbs per acre but you only got 1,500 lbs per acre the last 3 years.

● Suggested process to analyze the problem:

Investigating for limiting factor

Example almond production deficiency: Getting to the root cause

● Through scientific investigation you learn limiting factor is poor root development, specifically because of poor water percolation from the solid set sprinkler system

● Causes: sprinklers apply water too fast for clay soil low in OM%

Two part solution: 1) Plant cover crop which improves %OM and creates vertical channels in the soil profile; 2) switch to drip irrigation which emits water at rate that can percolate into the soil without puddling. Note, drip allows better irrigation control and MVP analysis indicates more efficient use of available water. T

Physical efficiency analysis: livestock example

● Not producing enough weight gain or salable animals from a pasture.

● Weakest link: inefficient use of grazing forage

● Solution: subdivide pastures and implement rotational grazing

2. Measures of financial comparison

● A. Budget reviews: the actual performance compared to your projected budget

● B. Comparative analysis: your subject farm compared to other farms in other areas of similar size and type for the same year(s)

● C. Trend analysis: record the performance over period of years to see historical performance thus track trends up or down

2. Measures of Financial Comparison A. budget reviews

● Deviations between projected and actual should be traced to the root cause – doesn't do much good to say my

farm didn't make as much profit as I had hoped for

● Example: “Know your onions!”

– Helps some but not a lot more to know it was the carrots not the broccoli that was the source of the deviation

– Was it lower prices, or higher costs? Technical inefficiency?

● Budget reviews are only as good as the details provide

● Excellent approach : – Cost accounting: with cost

centers organizing concept – Cost accounting at field

level for ● Whole farm

– Enterprise ● Field level

Elements of farm cost accounting

● Cost centers: fields, pieces of equipment, administration, etc.

● Physical data records: labor time sheet, tractor usage, materials applied.

● Financial records: typical accounting by categories of income and expenses – e.g. income such as sale of vegetables – e.g. expenses such as fertilizers, other supplies

Costing hourly usage of equipment

2. Measures of financial comparison: B. comparative information

● Sources of information: – published cost studies

& budgets – lenders – consultants – other farmers

2. Measures of financial comparison C. trends analysis

● Analytical process – Margin or threshold – Comparative ratio –

● Analytical category: – Profitability – Financial efficiency – Solvency – Liquidity – Repayment capacity

How might you measure the marginal cost or benefit?

● Enterprise budgets ● Whole farm budgets ● Cash flow budgets ● Look for the weakest link (remember Liebig's

law of the minimum) ● Partial budgets or cost & benefit analysis a

good tool for reviewing alternative approaches

2. Measures of financial comparison C. trends analysis

● Solvency: e.g. farm debt to asset ratio ● Liquidity: working capital (balance in cash flow account +

available credit) ● Profitability: Historical absolute net income trend by enterprise ● Efficiency: financial (e.g. NFIR), and physical elements ● Repayment capacity ● Appropriate scale: are there adequate resources & ability

to manage

Sample financial analysis chart

Item Budgeted goal or standard

Time 1:

Time 2: Analysis Process

Analysis Category

Working capital

Margin or threshold: a target number

Liquidity

Net income Margin or threshold: a target number

Profitability

Net Farm Income Ratio

Comparative Ratio: see scorecard

Financial efficiency

Debt/Asset Ratio

Comparative Ratio: see scorecard

Solvency

Capital debt repayment capacity

Margin or threshold: a target number

Repayment capacity

?

Solvency ratios

Solvency trend example Using Debt to Asset Ratio

Date Total Liabilities (Debt) Assets Debt/Asset Ratio 1. Jan. 2015 $100,000 $350,000 28.57% 1. Apr. 2015 $90,000 $345,000 26.09% 07/01/15 $115,000 $340,000 33.82% 10/01/15 $140,000 $335,000 41.79% 01/01/16 $190,000 $330,000 57.58% 04/01/16 $200,000 $325,000 61.54% 07/01/16 $200,000 $320,000 62.50% 10/01/16 $200,000 $315,000 63.49%

Liquidity trends: check working capital (balance in cash flow

account + available credit)

Tests for liquidity problems

● Compare purchase of assets to sales and depreciation: acquiring assets too fast?

● Operating debt: goal to repay annually ● Compare cash flow needed for land to typical rental rates ● Compare withdrawals for living expenses to opportunity

cost of unpaid labor ● Debt structure: Examine % current vs. % noncurrent

liabilities and assets – If top heavy, convert current to longer term debt

Profitability Analysis

● Just because a business is solvent and liquid as measured by a financial analysis, this doesn't necessarily mean it is profitable

● Profit analysis begins with a Income Statement

● Is net income a measure of profitability?

Historical trend analysis of tomato enterprise

is problem income or expenses?

Year Gross Income Expenses Net Income 2009 $250,000 $90,000 $160,000 2010 $325,000 $112,000 $213,000 2011 $300,000 $125,000 $175,000 2012 $275,000 $120,000 $155,000 2013 $250,000 $125,000 $125,000 2014 $250,000 $130,000 $120,000 2015 $225,000 $125,000 $100,000 2016 $200,000 $128,000 $72,000