FARM BUDGETING

1.0 Introduction

Budget is defined as an estimate of future incomes and expenditure. It is a numerical plan to quantify the numerical and financial effects of a proposed plan.

Farm budgets include gross margin budget, whole farm budget, partial budget, break even budgetand cash flow budget. These budgets should be done before the onset of the production cycle/season of any enterprise. These assist management on ascertaining on which enterprise to select and the scale at which to operate.

Unit 1

1.0 The Gross Margin Budget

This is a single enterprise budget showing the enterprise gross income, total variable costs and the gross income. An enterprise could be a livestock or crop under taking. Common examples include maize, beef, wheat and broilers.

1.1Objectives of the Unit

By the end of this unit you should be able to:

Measure gross output and gross income for an enterprise Estimate factor input quantities and their expected costs Calculate the gross margin for the enterprise Select the most profitable enterprise

1.2 Definition of Gross Margin Analysis Terms

1.2.1 Enterprise

It is an individual business activity which has distinct income and costs.

1.2.2 Gross Income (GI)

This refers to total value of the enterprise production. It can be found through multiplying total yield with price per unit. The total yield is referred to as gross output for instance ten tones of maize and four thousand litres of milk. Gross income=gross output x price/unit.

1.2.3 Variable Costs (VC)

These costs are directly related to the level of production. The costs can be directly allocated to a specific enterprise for instance cost of maize seed, fertilizers, and dipping costs for the dairy enterprise. There is a linear relationship between output and variable costs as shown below in fig 1.

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Costs variable cost curve

Size of enterprise Fig. 1 Variable Cost Against Output

1.2.4 Fixed Costs (FC)

These costs are unresponsive to changes in the size of enterprise. They are not directly allocable to an individual enterprise. Fixed costs are unavoidable even if you do not produce. Fig. 2 below shows the graphical relationship between output and fixed costs.

Costs

Fixed cost curve

Enterprise Size

Fig. 2 Fixed Costs against Enterprise Size

Fixed cost curve does not start at zero because fixed costs are incurred always. These costs include rent, rates, bank charges, electricity, interest on loans, accounting fees, permanent labour,depreciation

1.2.5 Gross Margin (GM)

The difference between gross income and total variable costs of an enterprise is referred to as gross margin.

Gross margin = gross income (GI)- total variable costs(TVC)

GM = GI- TVC

1.2.6 Livestock Trading Account

This is a livestock enterprise budget. It shows livestock trading profit, total variable cost and the gross margin for the livestock enterprise.

1.2.7 Fixed Standard Value (FSV)

The financial value assigned to a class of animals. This value does not change from year to year.

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1.2.8 Return Per Dollar Of Variable Cost

The ratio compares gross income to total variable costs of the enterprise.

1.2.9 Return Per Dollar InvestedThe ratio compares net farm income to total costs for the farm.

1.3 Steps Followed In Gross Margin Technique

i. Estimating and specifying input requirements. For this consider the recommendedinput quantities or use records for past seasons.

ii. Estimating the quantity of the output by considering the expected yield for the enterprise. Past records are useful for this exercise. The farm can also consider nation averages and records of neighbouring farms.

iii. Estimating prices of inputs and output by considering the current prices and an allowance for the inflation rate.

iv. Calculating gross income by multiplying total output with price per unit. Variablecosts are calculated by multiplying individual quantities by their price per unit andthe sum up to obtain total variable costs.

v. Comparing costs and returns by deducting total variable costs from gross income to obtain gross margin.

vi. Identify the most limiting factor and calculate returns to the factor. If land is limiting factor consider gross margin per hectare. If capital is the limiting factor consider return per dollar of variable costs. This helps in enterprise selection.

1.4 The Crop Gross margin budget

The maize gross margin budget

Size in hectares 15

Expected yield 4.3 tonnes per ha

Expected price $300

Gross income $ 19350

Variable Costs

Item units Quantity Cost per unit ($) Total costsLabour Tractor operating SeedFertilizerChemicalsPackaging TransportOther

Labour daysLitresKgKglitresbagsbags

2040450 3754500201290 12904% of VC

2.805.002.000.5013.000.601.50

5712225075022502607741935145

Total variable costs 14076

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Gross margin = Gross income- total variable costs

= $19350- $14076

=$5274

Return per dollar variable costs = Gross income Total variable costs

= $19350 $14076

= 1.37

Gross margin per hectare = Gross margin Number of hectares

= $5274 15ha

= $351.6/ha

Comments on the gross margin: the enterprise is viable because it has a positive gross margin. Return per dollar of 1.38 shows that gross income covers variable costs because it is greater than one. The gross margin per hectare of $351.6 shows the gross return for a hectare of the enterprise.

1.5 The livestock gross margin budget

It is necessary to do a reconciliation of livestock records before producing a livestock trading account. This is done to ensure the accuracy of records.

1.5.1The livestock reconciliation statement for a beef herd year ending 30 September 2010

class Stock 01/10/09

purchases births Transfer in Transfer outsales slaughters deaths stock30/09/10

BullsCowsCull cowsBullying heifersheifersSteersweanersCalves

2482

1220203040

---

55--

---

----52

-+12+13

+20+15+15+ 40

-13

-12-20

-30-40

20

2

3

24713

2520154049

Total 174 10 52 115 115 20 2 3 211

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1.5.2 The livestock trading account for the beef herd for year ending 30 September 2010

number FSV Total value Class of stock number FSV Total value24821220203040

500300250260240250180100

1 000 14 400 500 3 120 4 800 5 000 5 400 4 000

BullsCowsCull cowsBullying heifersheifersSteersweanersCalves

247132520154049

500300250260240250180100

1 00014 100 3 250 6 500 4 800 3 750 7 200 4 900

174 38 220 211 45 500

5

5

PurchasesBullying heifersheifers 1750

1500

20

2

SalesSteersSlaughtersCull cows

7 000

50010 3250 22 7 500

52Births calves 3

Deaths calves

Trading profit 11 530236 53 000 Total 236 53 000Hides sales $40

Variable costs

Labour $500

Tractor operating $100

Feeds $1200

Drugs $50

Veterinary charges $ 25

Transport $ 150

Other $50

Total variable $2075

Gross income = Trading profit + other income

= trading profit + hides sales

= $11530 + $40

= $11570

Gross margin = Gross income- Total variable costs

= $11570- $2075

=$9495

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Return per dollar variable costs = Gross income Total variable costs

= $11570 $2075

= 5.58

Calving percentage = number of births X 100% Cows + bulled heifers

= 52 X 100% = 86.7%

Mortality rate = number of deaths X 100% Average herd size

= number of deaths X 100% (Opening stock + closing stock)/2

= 3 X 100% (174+211)/2

= 1.6%

1.6 Limitations of gross margin analysis Can not effectively assess enterprises which utilize different types of land if land is

the limiting factor for example sheep production and potato production. Does not consider other factors which are not monetary like managerial skills and

social factors for example workers morale. Requirements for fixed costs differ per enterprise for example buildings, machinery

but gross margin does not cover this. Such costs cannot be allocated to individual enterprises

Assumes a straight line relationship ignoring diminishing marginal returns to the input factor.

It fails to capture changes in the environment for example low rainfall, in availability of inputs and changes in government policies.

1.7 Uses of the gross margin technique

The budget enables management to determine structure of farm business determined by the enterprise mix.

An assessment of viability of each enterprise can be done. The enterprises are ranked according to profitability and the most ideal ones are selected.

The whole farm gross margin is used to calculate the net farm profit. The information is required for planning purposes in future.

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UNIT 2

2.0 Total Farm Budgets

In farming the total budget is the whole farm budget which comprises a financial analysis for the whole farm business. This budget estimates the integrated income from all enterprises; all expected expenditure which includes variable costs, fixed costs and drawings by the farm owner. The whole farm budget covers the whole farming year starting from the first of October to the 30th of September of the following year. The budget shows the net farm income and farm surplus which shows business potential for growth.

2.1 Objectives of the Unit

After reading this unit you should be in a position to:

Define the total farm budget. State the objectives of the total budget. Explain the total budget situations. Construct the total budgets and interpret it.

2.2 Whole Farm Budgets Situations

The whole farm budget being the detailed and comprehensive financial plan, it is recommended in the following situations:

i) When a new farm is acquired.

ii) In measuring the performance of the existing farm business.

iii) When a complete overhaul of the farm business plan is required.

iv) The total farm is constructed when the farm is seeking finances and scheduling of loan repayments.

v) Estimating the farms commitments for the year such as living expenses, taxes and other personal requirements.

2.3 Planning the Farm Enterprise Mix

Procedure for establishing a profitable and ideal farm plan:

i) Conduct a stock inventory by listing all available factor input such as land, labour and capital.

ii) List all the feasible enterprise considering soil types, amount of rainfall, temperatures and markets.

iii) List all the limiting factors. These are the constraints which are likely to limit the sizes of different enterprises. Such limitations could be in the form of land classification, buildings,

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labour, machinery, irrigation facilities, and market demand and impose market quotas. The farmer should also consider his managerial skills and personal preferences.

iv) Workout the gross margin budgets for the targeted enterprises. Assuming that land is the mostlimiting factor, budgets could be worked out on per hectare basis for comparison. Depending on the farm situation, other limiting factors can be identified. If that is the case, produce gross margin budgets based on the most limiting factor such as return per variable expenditure. Determine the maximum possible enterprise sizes depending on the most limiting constraints.

v) Select the best performing enterprises on the basis of profitability and maximum possible sizesallowed by constraints. Some advanced techniques such as linear programming can be employed to come up with the ideal enterprise mix.

vi) Assess the level of fixed costs such as depreciation, interest payments, farm insurance, rent, telephone charges and managerial salaries. Fixed costs are required for the calculation of net farm income. The net farm income is the difference between the whole farm gross margin and the fixed costs.

vii) Estimate the farms commitments and personal expenditure requirements such as holiday allowances, living expenses, school fees and taxes. Personal expenditure items are referred to as drawings. These are required for the calculation of farm surplus. The farm surplus is calculated as net farm income less drawings.

viii) In view of the calculated farm surplus, future capital development plan can be developed. Examples of capital developments are acquiring fixed assets and constructing water supplies.

Plans can also be made to expand profitable enterprises and to introduce new and promising enterprises.

2.5 Methods of Farm Profitability

Farm profitability can be improved using the following methods discussed below:

i) Reduction of fixed costs. In the long run fixed costs can be reduced by acquiring efficient equipment such as modern tractors.

ii) Increasing out put by adopting new techniques of producing such as use of recently discovered hybrids.

iii) Reducing input cost by the use of recommended input quantities. Substitute machinery for labour. Acquire inputs at competitive prices.

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2.4 Structure of the Whole Farm Budgets

Enterprise Size YieldPricesGross income

Maize15ha4.3t/ha$300/t19350

Sorghum 8 ha4.8t/ha$280/t10752

Beef193 heads

11530Variable costsLabourTractor operatingSeedFertilizerChemicalsPackagingFeedsDrugsVeterinary charges Transportother

571222507502250260774

1935145

350414665701059162325

733244

500100

1200502515050

Total variable costs 14076 8141 2075

Gross income 19350 10752 11530Gross margin 5274 2611 9495Return per$ VC 1.37 1.32 5.56Whole farm gross marginMaizeSorghumBeef

527426119495 17380

Less fixed costsRentFarm insuranceElectricityDepreciation Interest charges

768106156418627 2651

Net farm income 14729Less drawingsTaxesLiving expensesHoliday expensesLoan redemption

1401200700500 2540

Farm surplus 12189

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2.6 Limitations of budgeting

i) Budgets are estimates and hence are not precisely accurate. They are based on forecasts of future events.

ii) They normally assume a linear relationship between output and inputs. This is not realistic since there are increasing and diminishing returns to factors of production.

iii) The interdependence of enterprises is ignored although some enterprises have some complementary relationship such as cereals and legumes. Legumes supply nitrogen to cereals and beef supply manure to crops.

iv) Budgets ignore non monetary factors such as managerial performance and motivation of workers.

v) The gross margin budget ignores fixed costs on the selection of enterprises. Some enterprises have more influence on fixed costs as compared to other enterprises.

ActivityAssuming a farmer has the following proposed farm plan:3 ha of groundnuts, 5ha of wheat and 4 ha of soya beans, produce gross margin budgets for the farm and show the expected farm surplus.

UNIT 3

3.0 Partial Budgeting

It is a marginal analysis technique, as it looks at the changes in costs and receipts and thus net farm income due to marginal changes in farming activities. Partial budgeting assesses financial implications on farm activities of proposed changes. Often farmers face problems on choice of enterprise between alternatives. The first question asked is would it pay? The other question would be which would pay best? The partial budget gives the most precise possible forecast of the financial effect of a proposed change.

3.1 Objectives of the Unit

By the end of this unit you should be able to:

Define the partial budget. Explain the uses of partial budget. Construct budget for minor changes to the farm plan. Interpret the results of the partial budget.

3.2 Uses of Partial Budgets

i) When planning product substitution (mix)

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This is done when one enterprise is substituted for another for example wheat for maize. Also when a land using enterprise is introduced, discarded or changed in size.

ii) When changing enterprise without substitution

This occurs when non land using enterprises are introduced or expanded, discarded or reduced for example pigs or poultry. Partial budget can be used where stocking rate of an existing area of grassland is altered.

iii) When planning change in method of production (factor substitution)

When a change in production technique is involved for example buying a machine instead of hiring a contractor or changing from hand harvesting to machine harvesting the budget can be used.

3.3 Steps in Partial Budgeting

Step 1

Describe and specify proposed changes stating what is involved and other information for example timing of change.

Step 2

List factors or items in existing system of production management that is likely to change.

Step 3

Determine gains, that is, what will contribute to increase in income this include, new income arising out of changes and cost saved as a result of change

Step 4

Determine losses that is, what would contribute to increase in costs or reduction in income. New costs incurred as a result of proposed change and income lost as a result of proposed change.

Step 5

Compare total gains to total costs and determine the net gain.

3.4 Partial Budget Layout

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Partial budget to assess impact of a change to substitute 50ha of tobacco for 50ha of maize.

Losses $ Gains $ Lost revenue:gross output maize50x7.6t/hax$5700 2166000

New revenue: gross output tobacco 50x2000kg/ha x $170 17000000

New costs:Variable costs tobacco 19735

Saved costs:Variable costs maize 14460

Net gain 2185735 17014460 17014460

The budget shows a positive net gain of $2 185 735. This is an expected addition to the net farm income if this change is implemented. A net loss shows that the change is reduce net farm income.

3.4.1 Return on Additional Investment

This ratio compares net gain to extra capital employed. For the above partial budget the ratio is determined as follows:

Return on additional investment = net gain Incremental capital

= net gain New cost saved costs

=2 185 735 5275

= 414.36

3.5 Advantages of partial budgeting.

This budget is useful for the selection of profitable enterprises. When there is an intention of introducing, discarding or reduction in size of non land enterprises this tool is most appropriate. Decisions can quickly be made on changing production technique basing on assessments done using the partial budget.

3.5 Limitations of Partial Budgeting;-The budget does not show the degree of risk associated with the change. Pre-requisites required before implementing or for implementing change are notshown. The human and social aspects like food security, labour retention or lay off are ignored.

UNIT 4

4.0 Break-even Budget

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The break-even budget is one of the simplest yet least used analytical tools in management. It aims to guide the farmer on minimum acceptable levels of output, prices and inputs. A

better understanding of break-even, for example, is expressing break-even sales as a percentage of actual sales. This can give managers a chance to understand when to expect to break even.The break-even point is where costs are equal total sales; there is no net loss or gain. A profit or aloss has not been made, although opportunity costs have been paid.4.1 Objectives of the UnitAfter studying this unit, you should be able to:

Calculate break even output and break even sales volume. Determine the break even input and break even cost for factors of production. Interpret the effect of changes in output and input factors to net farm income.

4.2 Definition of Terms4.2.1 Break even Budget This is a marginal analysis tool used to measure the effect of expanding or contracting an enterprise on the net profit. It determines the limiting levels of input and output levels to avoid losses.4.2.2 Break even Sales VolumeThis refers to the sales revenue which just equates total costs at a given level output. It is obtained by multiplying sales quantity by price per unit of output.4.2.3 Break even OutputIt is the physical quantity of output required for the enterprise to break even.4.2.4 Break even InputThis is the level of input at which the enterprise breaks even.4.2.5 Break even PriceThe minimum price of output or maximum price input at which the enterprise break even.4.2.6 Safety MarginThe output quantity by which the enterprise can be contracted without making a loss.4.2.7 Contribution per UnitThis is the gross margin per unit of output. The contribution per unit is found by dividing gross margin by unit of output.

4.2.8 Break even ChartsThe charts show the relationship of volume of sales, cost levels and profit. These charts assume linear relationship between revenue and costs.4.3 Uses and Application of the Break even BudgetThe budget is used to determine the minimum acceptable level of output for the enterprise to cover costs. It is a tool to determine the maximum level of inputs to avoid losses. Limiting pricesof outputs and inputs are drawn from the partial budget.

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Another important use of this budget is to assess viability of changes in techniques of production.In this case a partial budget is used assuming a net gain of zero. 4.4 Graphical Representation of Break Even VolumeTable 4.1 Maize production schedule

Output (tonnes) 1 2 3 4

Gross income $Variable costs $Fixed costs $Total costs $

250180140320

500360140500

750540140680

1000720140860

Figure 4.1Breakeven Chart for Maize ProductionIncomeAnd Costs Profit region $ Break even point Gross income Total costs Loss region 500 Fixed costs Margin of safety 0 0 1 2 3 4 Maize in tonnesGraphical Determination of Break Even PointWhere the gross income line crosses the total cost line, break even output can be read. In this case it is 2 tonnes. The break even sales value is $500.

4.5 Mathematical Calculation of Break even Point

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4.5.1 Simultaneous Equations Equation 1 The Total Revenue Line

y = bx where y is the gross income, b is price per unit and x is the outputy = 250x

Equation 2 Total Cost Liney = a + cx where y is the total cost, c is cost per unit, a is the fixed costs and x is the output y = 140 +180xSolution Total revenue = Total costs

250x = 140 +180 x x = 2 tonnes

Therefore the break even output is 2 tonnes of maize.

4.5.2 Contribution per Unit MethodBreak even quantity = Fixed Cost s

Contribution per unit

= 140 250-180

= 2 tonnes

4.5.3 Partial Budget Method

The problem quantity is assigned an unknown variable and the net gain is assumed to be zero.

Production plans for maize and ground nuts

Item Existing maize crop Proposed groundnut crop

Area 3ha 3ha

Yield (t/ha) 5 y

Price $/t 265 330

Variable costs/ha 440 468

4.5.3.1 Partial Budget to Determine the Breakeven Output of Groundnuts

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Losses $ Gains $Income lost Maize sales3 x 5x 265 3975

New IncomeGround nuts sales3 x y x 330 990y

New costsGroundnuts variable cost468 x 3 1404

Saved costsMaize variable cost440 x 3 1320

Net gain NIL 5379 1320 + 990y At break even point total revenue = Total costs

990y + 1320 = 5379

990y = 5379 1320

y = 4.1 Tonnes

4.6 Limitations of Break even Budgeti. It assumes that fixed costs (FC) are constant. Although, this is true in the short run, an

increase in the scale of production is likely to cause fixed costs to rise. ii. It assumes average variable costs are constant per unit of output, at least in the range

of likely quantities of sales. (i.e. linearity) iii. It assumes that the quantity of goods produced is equal to the quantity of goods sold

(i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).

iv. In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

Activitya) Define the following terms:

i. Break even sales valueii. Break even outputiii. Safety margin

b) sketch the following economic modelsi. Determination of break even outputii. The effect of a rise in the product priceiii. The effect of a drop in fixed costs to the safety margin

UNIT 5

5.0 CASH FLOW BUDGETING (CFB)

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The cash flow budget is a useful financial planning tool that is concerned with the showing ofcash requirement for the period ahead. It summarises the amount and timing of cash that isexpected to flow into and out of the business during a given budgetary period. The cash flowbudget can best be seen as a technique that helps the farmer to know how much money will berequired to carry out farming operations over a period of time, and when it will be required. It isstrictly concerned with the timing of cash payments and receipts.

5.1 Unit objectives of the Unit

By the end of this unit, the student should be able to

Define a cash flow budget Give the uses and applications of the cash flow budget Produce the monthly, quarterly and annual cash flow budgets Interpret a cash flow budget Make a decision based on the cash flow budget

5.2 Uses and Applications of the Cash Flow Budget

As stated in Section 5.0, the cash flow budget shows when cash is available to the businessduring a particular period (cash receipts) and when cash payments need to be made for goods andservices. It therefore helps management to plan when cash is likely to be in surplus or deficit,hence allowing managers to put the surplus to work earning extra income through increasedproduction, savings or investment. The determination of cash deficits on the other hand can helpmanagers to decide when to and how much borrowing may have to be done in the upcomingperiod.

A cash flow budget that has been done properly and using realistic information will achieve thefollowing:

a) Show when peak cash or shortage of it occurs, as well as the amount and duration of cashrequirements;

b) Reveal opportunities for manipulation of purchases and sales to the farmers best advantage,and will as a result assist in keeping peak cash requirements to a minimum;

c) Will show whether it is necessary to alter a proposed production programme if cashrequirements exceed credit facilities;

d) Show when there is need to borrow in order to have sufficient working capital for examplebank loans and hire purchase finance. It indicates when short term loans are required and for howlong;

e) Allows for comparison of actual expenditure versus budgeted expenditure for the period,thereby allowing adjustments to be made.

f). Enable the farmer to use such results as and when actual and budgeted figures are different, tomake the necessary changes quickly.

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g). It is essential for a farmer wishing to obtain credit from a financial institution. Usually, it willhave to be presented together with the relevant gross margin budgets.

It is important to note that while the gross margin budget indicates income earned by anenterprise and associated costs of the inputs used, the cash flow budget indicates the exact timingof both receipts and payments for the same enterprise. It also has to be noted that if there is noprofit, sooner or later the farm operations will have to be stopped due to lack of funds for thenecessary inputs to keep the farm running.

5.3 Monthly, Quarterly and Annual Cash Flow Budgets

Cash flow budgets are done to cover specific uniform time intervals. The duration of the timeinterval used is usually determined by the nature and size of the business or enterprise, and howlong it takes to yield produce.

5.3.1 Monthly Cash Flow Budget

A monthly cash flow budget captures cash inflows and outflows on a monthly basis. This ismostly convenient for agricultural enterprises since it is critical to capture the cash movementsthat happen over the production cycle. Most agricultural enterprises, especially crops, areseasonal and take less than a year to yield produce. There are however some exceptions whichinclude orchards and other plantation crops, as well as large ruminants.

A typical monthly cash flow budget can be made for the enterprise budgets. For each enterprise,it is determined when exactly each input is bought, and when exactly payment for the produce isexpected to be received. This information is entered in the appropriate month. The givenexample lumps similar inputs for the different enterprises.

5.3.2 Monthly Cash Flow Budget

ITEM TOTAL MONTHLY CASH FLOW (US$)

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OCT. NOV. DEC. JAN. FEB. MAR.INCOME Maize 19,350.00 14,512.50 4,837.50 Sorghum 10,752.00 6,451.20 4,300.80 Beef 19601.00 6,341.50 4,035.50 6,918.00 2,306.00Interest 30.00 30.00 Total Income 49733.00 20,963.70 4,837.50 10642.30 4,035.50 6948.00 2,306.00 EXPENDITURE Labour 13533.21 2,619.33 2,619.33 2,619.33 2,619.33 2,619.33 436.56Tractor Operating 3,816.00 1,908.00 954.00 381.60 572.40Seed 1,320.00 1,320.00 Fertiliser 3,309.00 3,309.00 Chemical 422.00 222.00 200.00 Packaging Material 1,099.00 1,099.00Feeds 1,200.00 600.00 600.00Drugs 50.00 50.00 Vet charges 25.00 25.00 Household expenses 6,400.00 640.00 640.00 640.00 3,200.00 640.00 640.00Interest on loans 1,500.00 250.00 250.00 250.00 250.00 250.00 250.00Loan repayment 2,100.00 350.00 350.00 350.00 350.00 350.00 350.00Dam construction 8,500.00 6,500.00 2,000.00 Water charges 504.00 125.00 95.00 65.00 59.00 90.00 70.00Electricity 219.00 30.00 25.00 32.00 43.00 37.00 52.00Other 439.00 300.00 39.00 100.00Total Expenses 44436.21 17,623.33 7,197.33 3956.33 6,521.33 4,967.93 4,169.96 Net cash flow 3340.37 -2359.83 6685.97 -2485.83 1980.07 -1863.96OPENING BALANCE 4,000.00 7340.37 4980.54 11666.51 9180.68 11160.75CUMULATIVE BALANCE 7340.37 4980.54 11666.51 9180.68 11160.75 9296.79

It will be noted that the actual month when a transaction occurs is indicated. The OpeningBalance indicates the amount that is in the farm business at the beginning of each month. TheCumulative Balance is the amount that is available at the end of each period and is given by thenet receipts and previous month balance

Cumulative Balance = previous month + net cash flow for the month

The cumulative balance for any period will be the opening balance for the next period. Forinstance, the cumulative balance for October will be the opening balance for November.

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5.3.3 Quarterly Cash Flow Budget

The quarterly cash flow budget is produced by dividing the year into four equal time periods ofthree months each. The Actual months in each quarter may be indicated but alternatively, theperiods can simply be referred to as 1st Quarter, 2nd Quarter, 3rd Quarter and 4th Quarter. This kindof cash flow budget is conveniently used in situations where the movement of cash is not sofrequent. Each entry will represent cash movement over the three months in each quarter, not realindicating during which part of the quarter the cash movement actually took place

5.3.4 Quarterly Cash Flow Budget

ITEM TOTAL QUARTERLY CASHFLOW (US$) Oct- Dec Jan-Mar Apr-Jun Jul-Sep

INCOME Maize 12,000.00 3,500.00 8,500.00 Potato 9,600.00 6,700.00 2,900.00 Soyabean 2,500.00 1,750.00 750.00 Broilers 4,152.00 1,053.00 900.00 1,504.00 695.00 Dividends 770.00 450.00 320.00 Total Income 29022.00 1503.00 900.00 13774.00 12845.00 EXPENDITURE Labour 8,350.00 2,000.00 1,950.00 2,250.00 2,150.00 Tractor Operating 3,625.00 960.00 765.00 1,280.00 620.00 Seed 2,100.00 350.00 1,750.00 Fertiliser 3,150.00 2,800.00 350.00 Chemical 312.00 312.00 Packaging Material 85.00 45.00 40.00 Electricity 140.00 32.00 45.00 28.00 35.00 Rentals 300.00 75.00 75.00 75.00 75.00 Household expenses 3,470.00 1,500.00 800.00 650.00 520.00 Loan repayment 1,000.00 250.00 250.00 250.00 250.00 Interest on loans 250.00 62.50 62.50 62.50 62.50 Total Expenses 22,782.00 8,341.50 5,742.50 4,635.50 4,062.50 Net cash flow -6838.50 -4842.50 9138.50 8782.50OPENING BALANCE 1,000.00 -5,838.50 -10681.00 -1542.50CUMULATIVE BALANCE -5838.50 -10681.00 -1542.50 7240.00

Calculations of the cumulative balance are done in the same manner as they are done for themonthly cash flow budget.

5.3.4 Annual Cash Flow Budget

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The annual cash flow budget is useful for big projects with a relatively long life span. It isnecessary for the purposes of determining whether a farmer will be able to repay a loan. As such,the budget uses yearly periods.

5.3.5 ANNUAL CASH FLOW BUDGET

ITEM TOTAL YEARLY CASH FLOW (USD) 1 2 3 4 5

INCOME Maize 11,175.00 1,200.00 1,275.00 2,400.00 2,550.00 3,750.00 Potato 32,150.00 4,500.00 5,400.00 5,750.00 7,000.00 9,500.00 Soya bean 18,195.00 2,350.00 2,500.00 3,750.00 4,020.00 5,575.00 Eggs 20,420.00 2,410.00 3,900.00 4,290.00 4,300.00 5,520.00 Pork 14,930.00 2,500.00 2,650.00 2,780.00 3,110.00 3,890.00 Interest 750.00 150.00 150.00 150.00 150.00 150.00 Dividends 1,315.00 200.00 150.00 345.00 220.00 400.00 Total Income 98935.00 13310.00 16025.00 19465.00 21350.00 28785.00 EXPENDITURE Labour 29,500.00 5,250.00 5,750.00 5,800.00 6,200.00 6,500.00 Tractor Operating 8,465.00 4,330.00 550.00 765.00 1,245.00 1,575.00 Seed 16,740.00 2,400.00 3,175.00 3,500.00 3,650.00 4,015.00 Fertiliser 22,510.00 4,200.00 4,470.00 4,590.00 4,500.00 4,750.00 Chemical 1,295.00 210.00 245.00 265.00 275.00 300.00 Packaging Material 490.00 60.00 75.00 100.00 125.00 130.00 Electricity 1,825.00 375.00 380.00 385.00 340.00 345.00 Rentals 1,250.00 250.00 250.00 250.00 250.00 250.00 Household expenses 11,900.00 1,200.00 1,450.00 2,000.00 3,500.00 3,750.00 Interest on loans 375.00 75.00 75.00 75.00 75.00 75.00 Total Expenses 94,350.00 18,350.00 16,420.00 17,730.00 20,160.00 21,690.00 Net cashflow -5040.00 -395 1735.00 1190.00 7095.00OPENING BALANCE 1,500.00 -3540.00 -3935.00 -2200.00 -1010.00CUMULATIVE BALANCE -3540.00 -3935.00 -2200.00 -1010.00 6085.00

5.4 Calculation of Interest on Overdraft and Credit Balance.

5.4.1calculation of Interest on Overdraft

Assuming an overdraft of $500 charged at an interest rate of 12% per annum semi annually.Calculate the interest as follows:

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ER = (1+r/m) m -1

= (1.06)2-1

=12.36%

Interest =$500 x 0.1236

= $61.80

5.4.1 Calculation of Interest on Credit Balance

Assuming a credit balance of $1000 for a month at 12% per annum charged monthly, calculateinterest received as follows:

An =1000 (1+r/m) m n

= 1000 (1.12/12)12 = 1000 (1.01)12

= $1126.83

Interest =An -p

=$ 1126.83-1000

=$126.83

5.5 Advantages and Disadvantages of Using Cash Flow Budgets

5.4.1 Advantages

Cash flow budgets assist management to detect periods of cash deficits and so enablearrangements to be made on time to look for alternative sources. Any extra cash can be properlyplanned and either used for further expansion of the business or investment on the moneymarket.

5.4.2 Disadvantages

Cash flow budgets are estimates of future receipts and payments hence they can not be preciselyaccurate. The price regime may change during the course of the budgetary period rendering thebudgets useless.

Activitya) Define the following terms as used in cash flow budgets

i. Quarterly cash flow budgets.ii. Cash inflowiii. Cash out flowiv. Cumulative balance.

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b) Give possible reason why a particular time period gives negative net cash flow.c) Comment on the cash inflows and cash out flows for layers, piggery and maize with regards totiming of flows.

REFERENCES

Beierlein James G, Schneeberger Kenneth C and Osburn Donald D, (1995), Principles ofAgribusiness Management, Waveland Press Inc.

Chard P G D (1979), Farm Management in Southern Africa, Modern Farming Publications

Coy D V (1982), Accounting and Finance for Managers in Tropical Agriculture. Longman

Francis A (1998), Business Mathematics and Statistics, Ashford Colour Press, Britain.

Gietema B(ed.), Cremers M F J M, Heykoop A and van de Valk Y S (2001), The Farm as aCommercial Enterprise, STOAS Human Resources Development World Wide

Jindu P, Farm Budgeting Module for Students doing Agriculture at Diploma or UniversityLevel.

David T.Johnson (1983) The Business of farming The Macmillan Press LTD London

Lucey T (1992), Cost and Management Accounting, The Guernsy Press Co. Ltd, Great Britain.

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