Performance of the Farm to the Farmers and Governmental and Non-Governmental Organizations - Assignment Example

? Farm Resource Appraisal Contents A) Farm Visit: Data Collection Techniques and Sources 3 a. Field Material Input Record: Figure 4 b. Labor Record: Figure 2 4 c. Income Record: Figure 3 5 d. Farm Expense Record: Figure 4 5 B) Farm Inventory 5 a. Inventory Illustration 7 C) Resource Appraisal 8 a. Categorizing Assets and Liabilities 8 b. Asset Valuation 9 c. Balance Sheet and Net Worth 10 D) Appendices a. Appendix 1-A: Farm Inventory Illustration 12 b. Appendix 1-B: Balance Sheet 13 Farm Visit: Data Collection Techniques and Sources Farm Resource Assessment provides information on the performance of the farm not only to the farmers but also governmental and non-governmental organizations. Measurement of assets and liabilities of the farm give its clear financial standing which can help identify and solve farming issues. Data for appraisals can be collected from farm records, production and market research and from other consultant agencies. This information can be collected in the form of surveys and interviews. General physical and technical information has to be collected on the farm visit such as soil characteristic, climate and weather, land characteristics, production capacity, production technology and labor inputs. Soil characteristics encompass soil type, texture and soil analysis. Climate takes into account factors such as temperature, rainfall, humidity, droughts and hurricanes. Slope, topography and land elevation fall in land characteristics while yield per acre or hectare is covered in the productions capacity. Production technology accounts for the harvest and post-harvest operations, diesel control and fertilizers. Finally details of labor such as its source, distribution and gender are covered in the labor inputs. To prepare a farm resource appraisal, farm visit is necessary and along with the general physical and technical information, farm records and accounts information is also necessary. It can help farmers manage the farm properly since farm records and accounts can assist in measuring economic performance, meeting legal requirements etc. Moreover, operational records serve as a key factor in managing everyday activities of the farm. Financial records on the other hand can be used to evaluate the farm and for tax purposes. Some of the operational records are the farm map, field material input record, labor records and livestock records, income records and farm expense records. Balance sheet, on the other hand is the most commonly used financial record. It states the assets and their sources of financing. It is primarily used for taxation purposes. The farm map should be relative to the scale and must highlight field and other major areas of the farm. Field material input record provides information on material inputs such as fertilizers and seeds. Labor records gauge the workers-days per task information. Livestock records provide the information related to keeping livestock. Lastly, revenue and cost are covered in income and farm expenditure record. Sample records (Food and Agriculture Organization of the United Nations 2006) of field material input, labor, income and expenditure have been presented below for better understanding. Field Material Input Record (figure 1) Area Planted: Date Input Quantity Price per unit Value                               Total         Labor Record (figure 2) Area Planted: Date Task Persons/ task Hired Value (labor days)       No./ day Cost/ day Value                                             Total             Income Record (figure 3) Area Planted: Date Product Sold Stored     Quantity Price/unit Value $                                     Total           Farm Expenditure Record (figure 4) Area Planted: Date Item Quantity Price / Unit Value                                         Total         Farm Inventory The next step is the farm inventory count, recording resources and methods of valuation. The ideal time for farm inventory is a few weeks before the start of the new crop period. This ensures that most products of the farm have been harvested. Information regarding this matter should be collected in a timely manner. A thorough farm inventory should be conducted to list down all the farm assets in a systematic manner. This information forms the basis of financial assessment of the farm. This information can also help measure the performance by comparing it to the statistics of the previous period. The ending inventory of previous period serves as the opening inventory of the current period. Comparing the beginning inventories of consecutive periods can tell us how the financial position of the farm has altered after the production period. At the farm, all the assets should be physically verified and valuated. There are many methods of putting values to assets and calculating their relative depreciation. Following is a set of general guidelines for farm inventory assessment: 1. Generally inspect all the farm assets. 2. Categorize the items accordingly. Here is list of general categories: a. Land b. Buildings c. Machinery d. Livestock e. Tools and equipment f. Material inputs on hand and standing g. Farm product on hand and standing 3. Record the acquisition date/year and cost of the specific property. 4. Record the useful life of all the items. 5. Calculate the rate of depreciation and calculate the value of depreciation on depreciable assets. To conduct this assessment one should have moderate knowledge of capital asset, salvage value, capital depreciation and its various methods. The easiest and most recommended method is straight line depreciation. Inventory Illustration Consider an example (Food and Agriculture Organization of the United Nations 2006) of a tractor that was purchased in 2005 for a price of $1000 and a useful life of ten years. Now first of all, categorize the tractor in machinery and equipment and start by mentioning the year of purchase which is 2005. Note down the cost of the tractor and its useful life. To calculate depreciation, salvage value of the property is required. Salvage value is determined arbitrarily because there is no exact formula for it. Most of the time, for items in the category of vehicles and machinery, the salvage value is taken to be somewhere between 5% to 10% of the actual cost of the item. So in our example let us take 10 percent as the salvage value of the tractor. Salvage Value = 10% of 1000 = $ 100 Annual depreciation of the tractor can be computed using the following formula: Annual Depreciation = (purchase price – salvage value) / useful life = (1000 – 100) / 10 = $ 90 So the annual depreciation comes out to be $ 90. Now compound this figure over the number of years, the tractor has been used after its purchase. This will give the accumulated depreciation. In this case the accumulated depreciation of the tractor from the year 2005 to 2012 is: Accumulated depreciation = annual depreciation * no. of years since purchase = 90 * 7 = $ 630 The next step is to identify the number of tractors at the beginning of the current period. For simplicity sake, let us take this number to be one. Now calculate the initial value of the tractor for the current period which is 2012 by the following formula: Opening/ initial value = Purchase price – accumulated depreciation = 1000 – 630 = $ 370 Next, indicate the number of tractors at the end of the current period i.e. 2006. Again for simplicity sake assume this number to be one. Lastly, compute the closing value of the tractor by subtracting the annual depreciation from the initial value. Closing value = initial value – annual depreciation = 370 – 90 = $ 280 A chart of this illustration has been given in Appendix 1-A. Resource Appraisal Farm resource assessment should be accurate in order for the farmers to manage the farm properly. Resource appraisal is a farmer’s doorway to the type, quality and quantity of his resources and the obligations created from these resources. Farming business is generally very liquid but still the level of liquidity varies. So every farmer must be familiar with all the details of his farm. Therefore, a resource appraisal is an important objective to accomplish. It takes the form of a balance sheet which will be described later. Resource appraisal helps the farmer and other institutions to assess the financial standing of the farm. Categorizing Assets and Liabilities To prepare a resource appraisal, one must possess adequate knowledge of the assets and liabilities. Assets are simply the property of the farmers from which future economic benefit is expected. Assets can be divided into two categories depending on their liquidity. These two categories are current assets and fixed assets. Fixed assets have a useful life of several years, for example Land and buildings. Current assets on the other hand are short term and have higher liquidity. Cash in hand, livestock and feed are some examples of current assets. Liabilities on the other hand are the financial obligations created from the assets. Liabilities too can be divided into current and fixed liabilities depending upon the term of their payment. Current liabilities contain obligation that are due within a year such as principal payments of a loan. Liabilities that are due beyond the time frame of one year such as long-term contracts are categorized as fixed or long term liabilities. Asset Valuation The basic understanding of assets and liabilities can help in categorizing the items in the resource appraisal. The next step in preparing a resource appraisal is the valuation of assets. All the assets need to be expressed in monetary terms on the balance sheet. Asset valuation depends on the nature and purpose of the asset. Assets with a higher liquidity are generally valued at market value while low-liquidity assets are measured by other methods. Purchase price, production cost, market value, depreciation subtracted from purchase price and lower of purchase and market value are some of the asset valuation methods. Market value is mostly used for items that can be easily sold in a short period of time. Purchase price is used for items recently purchased. Lower of purchase and market value is used where placing a higher value on the property is undesirable such as for land. Products of the farm are normally valued at production cost. It is useful in cases where the yield and prices are volatile. Long term depreciable assets are generally valued at purchase price minus accumulated depreciation. Familiarizing oneself with these tips can help in preparing a resource appraisal. Balance Sheet and Net Worth Next part is the preparation of the balance sheet and computing the net worth of the farm (see appendix 1-B for a sample balance sheet). Net worth and financial ratios help farmers in assessing the past and future performance of the farm. Balance sheet is a financial statement that lists all the assets on one side and all the liabilities on the other side. Its basic principle is that the assets must balance the liabilities of the business. Net worth can be thought of as the good will of the business. It is the difference between the value of the owned assets and liabilities. Current ratio is a financial ratio that indicated the liquidity of the business. It is the ration between the current assets and current liabilities of the business. If this ratio is less than one, then it means that the business is less liquid. If the ratio is greater than one, then it means that the business is more liquid. If the current assets equal current liabilities then the current ratio equals one which means that even though the current assets can cover the current liabilities, there is no safety net or margin. A farm resource appraisal requires all the above mentioned information regarding the farm. A balance sheet in which liabilities are greater than asset means that the net worth of the farm is negative. Net worth changes even during the period; therefore quarterly or semi-annual net worth can be directly compared with each other. Net worth can tell the farmer about three things namely: 1. Working capital: Capital available after current assets are set off against current liabilities. 2. Farm solvency: The capability of the farm to pay its debts. 3. Owner’s equity: Share of the owner. Net worth can guide the farmer on the extent to which he/she should take risks. Moreover, banks and other financial institutions assess the financial standing of an entity from its net worth. In short, net worth and current ratio are the measures of the farm’s financial capacity. Appendices Appendix 1-A: Farm Inventory Illustration Items Year of purchase Cost Useful life Salvage value Annual Depreciation Accumulated Depreciation Initial Closing               No. Value No. Value                       Tractor 2005 1000 10 100 90 630 1 370 1 280                                                                                                               Total                     Appendix 1-B: Balance Sheet Assets $   Liabilities $ Current Assets   Current Liabilities Cash 1000   Short term loans 1500 Seed 750   Creditors 2000 Fertilizers 750       Loans 1000                 Fixed Assets   Fixed Liabilities Land 8000   Long Term Loan 12000 Building 4000                           Total 15500   Total 15500 Works Cited DEFRA. 2004. Working in farming - business advice. [ONLINE] Available at: http://archive.defra.gov.uk/foodfarm/farmmanage/advice/index.htm. [Accessed 03 August 12]. Food and Agriculture Organization of the United Nations. 2006. Farm Planning And Management For Trainers Of Extension Workers. [ONLINE] Available at: http://www.fao.org/docrep/010/a0812e/a0812e00.htm. [Accessed 04 August 12]. Food and Agriculture Organization of the United Nations. 2000. Grassland resource assessment for pastoral systems. [ONLINE] Available at: http://www.fao.org/docrep/003/X9137E/X9137E00.HTM. [Accessed 03 August 12] Julian Swindell . 1996. Information Technology and the Rural Surveyor. [ONLINE] Available at: http://cebe.cf.ac.uk/learning/habitat/HABITAT4/rural.html. [Accessed 03 August 12]. The Minnesota Project. 2002. Whole Farm Resource Assessment Valuing All Farming Results . [ONLINE] Available at: http://www.mnproject.org/ag-ARM_WholeFarm.html. [Accessed 03 August 12]. Read More