Business considerations of farm enterprise and its technological aspects

This process of analyzing a farm goes to the manager who gathers information that is needed for decision making with regards to the operation and organizing the farm business. Bear in mind that when you are analyzing the farm business, you have to include either the whole farm or just one part of the enterprise. It is really up to the manager what will be involved in the analysis. All you have to do is to get the needed information and then later on, you will give that to the manager for him to decide on some important things about the farm.

To complete this analysis, you may use different types or ways of conducting analysis. It may be done by using a comparative analysis, projected analysis or even ratio type of analysis. It is up to the team who will be conducting the analysis and based on the type of information needed by the manager of the farm. Usually, in conducting these kinds of analysis, the main goal is to get the information about the mission or the goals of the farm. What are the projected things that the farm plans to do in order to attain the goals that they have set up?

How to Start Analysis?

By using the abovementioned questions, you may start the analysis by reviewing the current sources and the plan for operation, the goals with the considered alternatives and try to look over on how to move the said farm from where it should be based on the statement of the manager. This is essential because it will help you analyze whether the farm has a potential to achieve the said goals and if the farm is ready for these goals. In your analysis you should also start to look over the budget and the cash flow. This is essential for the budget is the one that keeps the farm going and without this, the farm will be impaired and would not be able to do the things that it desires to do. This said budget is also used to get information like the expenses and the resource use which is connected to the enterprise that the business produces. You will get this information from the balance sheets prepared by the farm every time they cash out some budget. The assets and the liabilities are also essential information that you will need to be able to analyze whether the farm is whether earning more than spending or spending more than earning. When you know these things, it would be much easier to analyze the financial aspects of the farm.

Importance of Analysis

Having a business analysis for your farm will be very essential because it will help you see things in a much larger scope. You will get information that will help you improve the work of your farm and give you a chance to expand the scope of the production. It will also help you monitor the cash flow which is an important aspect of your farm. You have to look closer to your budget because this will get your farm into heights.

Types of Agricultural Projects:

1. Water Resource Development:

A capital intensive project. To reap the benefit of irrigation the farmer should not ignore the supporting services as extension, marketing, credit and transportation both for handling crop produced and supply of inputs needed. The economic analysis must take full account of all the attributes costs and benefits streams.

2. Agricultural Credit:

It makes the viable commercial operation. To enable a larger number of farmers to make needed investment to improve their income and level of living.

3. Agricultural Industries and Commercial Development:

These projects help improve the adequacy and timeliness of input supplies and specialised services to farming, forestry and fisheries or else help improve the storage, processing and marketing systems.

Aspects of Agricultural Project Evaluation:

(a) Technical Aspects:

Technical aspects which concerns itself with inputs and outputs of real goods and services.

(b) Managerial and Administrative Aspects:

These are the key to success or failure of the project and is difficult to evaluate.

(c) Organizational Aspects:

Closely related to organizational and administrative aspects.

(d) Commercial Aspects:

This involves arrangement for marketing outputs produced by the project and arrangements for the supply of materials and services needed to build and operate the project.

(e) Financial Aspects:

Deals with the revenue earning consideration of a project and also securing funds for it and its repayment and see if the project has become viable or not.

(f) Economic Aspects:

The economic analysis is directed towards whether it contributes significantly to the development of the economy as a whole and if it contributes greatly it is worth investing in such project the scarce resources having alternative uses.

Economic Analysis of an Agricultural Project:

1. The main aim or interest is total returns or productivity or profitability to the whole society or economy. Regardless of who invests and who gets the benefit.

2. Capital resources should be invested where there are maximum economic growth and yields higher social or economic returns. The project which gives maximum return to capital is given high priority.

The economic analysis basically allows for remuneration to labor and other inputs at market prices or shadow prices which are intended to appro­ximate true opportunity costs. Everything leftover is then compared to the capital needs necessary for the project.

Financial Analysis of an Agricultural Project:

1. Those who participate in the project such as farmers, business men, entrepreneurs, private corporations, public agencies are concerned returns to equity capital con­tributed by them it is called either financial or private return.

2. In financial analysis we are much con­cerned about the income distribution and capital ownership. Here we measure returns to the equity capital contributed to the project by each of its various participants public or private. Financial analysis may be applied to the cost and returns of the various public entities which participate in the project.

Financial analysis is important when we return to a consideration of the incentives structure associated with the proposed project investment. A project in this light should be profitable to farmers although it is profitable to the entire economy.

3. Timing of return is also important.

Costs in Agricultural Projects:

The following are the cost items in the cost-benefit analysis:

1. Goods and service, although they are difficult to identify.

2. Labor—it is not difficult to identify.

3. Cost of land (net value of production foregone). The identification would be with or without. What we calculate is the difference between what the enterprise was with which the land is presently occupied than what was produced under the enterprise earlier.

This is what is called incremental output. By this the economic cost of land under agricultural project grows out of this concept of what net value of production or opportunity cost.

There are three attributes to be allowed for value of land in an economic analysis:

(i) The value of land at its purchase price—a lump sum money invested in the purchase of land before the project started.

(ii) The value of land as a rental cost accounted year to year.

(iii) The value of land as an opportunity cost (value foregone).

4. Taxes, these are the transfer of payments.

In the case of financial analysis, from the point of view of individual entity, all taxes are treated as cost. In the case of economic analysis, a return to the whole society, the taxes are transferred payments. The taxes in economic analysis are not deducted from the income stream as a cost. This applies for all forms of taxes.

5. Subsidies, pose special problem. For example, subsidy on fertilizer reduces the cost thus increases income. This is an incentive to adopt new technology and also on distributional ground. In financial analysis, subsidies pose no problem as subsidies reduce cost and money transfer goes to those who participate in the project.

In economic analysis, we adjust market prices to reflect the amount of any subsidy. Since subsidy reduces input costs, then we must add subsidy to market price of the commodity. If the subsidy operates to raise prices, then in economic analysis we deduct the amount of subsidy from the market value of the product before entering in our economic analysis.

Benefits of an Agricultural Project:

Benefit can arise either from increased value of or from reduced costs.

1. Increased Value of Output:

The value of output increases by the following reasons:

(a) Greater Physical Production:

For example, irrigation project will increase production. In case of credit the farmers are enabled to buy inputs which would boost output. This will increase additional food intake by the farmers’ family or sold in the market.

(b) Quality Improvement:

For example, a dairy project helps in the processing of milk into milk products which has higher value (value addition), but estimate of benefit should be done cautiously.

(c) Change in Location and Time of Sale:

In marketing for example, the storage facilities as a public undertaking will create time utility and when the price increases the sale could be undertaken again, as the road construction will trans-ship the products to distance market which will add place utility.

(d) Change in Form:

Processing of fruits, vegetables, animal products create form utility and also time utility which accrues benefit to the producers.

2. Cost Reduction:

Some projects act as cost reducing:

(a) Gains from Mechanization:

Use of tractor or other machinery may increase or may not increase output but reduce the cost per unit of the products. Mechanization may replace human labor reducing cost but human labor should find alternative source of employment.

(b) Reduced Transportation Cost:

Better transportation facilities in transferring agricultural produces from the point of production to the point of sale may reduce cost which may be shared by the farmer, transporters, and consumers.

(c) Losses Avoided:

Better equipment reduces loss with the increased efficiency.

3. Other Kinds of Direct Benefits:

For example, opening school for both formal and non-formal education increases the earning capacity of the educated persons.

Secondary Costs and Benefits:

These arise outside the project and this should be used in economic analysis not in financial analysis. For example, some projects like building of dams increases the employment opportunity which increases income and has a multiplier effect.

Intangible Benefits:

Intangible benefits comprise of better income distribution, national integration, a better life for rural people and better national defense

Comparison of Costs and Benefits:

If projects are of long duration the project would have differently shaped the future cost and benefits and thus the alternative projects should be compared for its benefit.

The following are the discounting methods applied to agricultural projects:

(a) Benefit-Cost Ratio.

(b) Net present Worth.

(c) Internal Rate of Return.

There are undiscounted measures as well. These are:

1. Ranking by inspection,

2. Payback period,

3. Proceeds per Rs. of outlay,

4. Average annual proceeds per rupee of outlay,

5. Average income on book value of the investment.