Farm Business Analysis

Farm business analysis is the name given to a technique based on computation and
interpretation of a variety of efficiency measures for the farm under study. The results of the
analysis are then compared with standards derived from a group of farms of a similar size and
type. This comparison is used to highlight organisational weaknesses and strengths
of the farm business. If farm accounts are available, this system of farm business analysis
can be a useful tool. The subject of farm business analysis is dealt with under different
names, i.e. Farm Accountancy, Farm Records and Accounts or Farm Book Keeping. The
objective is the same and the difference lies in the methods of treatment or approaches.
Farm Accountancy is defamed as the art as well as the science of recording in books the
business transactions in a regular and systematic manner, so that their nature, extent and
financial effects can be readily ascertained at any time of the year.
Farm Book Keeping is known as a system of records written to furnish a history of the
business transactions, with special reference to its financial side (Adams). Farm accounting
thus, in the usual sense is an application of the. accounting principles to the business of
farming. The objective of Farm Records and Accounts is to provide control over the business
and improve the management of the farm.

Farm Records and Accounts

With the help of farm records, the farmer knows:
1) Which enterprises are making profit or losing money, i.e, to check on performance of
different enterprises.
2) Which enterprises are returning most over his capital investment,
3) To guide future decisions.
4) Whether to go in for specialisation or diversification.
5) To provide planning data for use in making or revising future
6) plans.
7) Whether addition of new activities will boost the rate of return on his capital.

Farm records should reveal the strengths in a business that can be exploited and the
weaknesses that must be removed. Farm records help existing labour and capital returns for
the various practices and enterprises and provide the basis for comparison with new
ones which might be used. Farm records provide details on the previous year's operations,
showing which enterprise gave the greatest return on capital, as well as the degree of
technical and economic efficiency attained in the various business aspects.
Farm records not only indicate progress made in crop yields, livestock efficiency and return
on investment, but they also show progress in capital accumulation, net worth and in general
efficiency in management New directions can be determined to fit into alternative plans. So
farm records are to be maintained to judge the farming efficiency and
profitability of farming.

CHARACTERISTICS OF GOOD RECORD SYSTEM

1) Easy to keep and be up to date.
2) Give needed information for analysis.
3) Provide the information when needed and serve a definite purpose.
4) Permit the analysis of the information needed.
ADVANTAGES OF FARM RECORDS AND ACCOUNTS
1) Means to higher income
2) Basis for diagnosis and planning
3) Way to improve the managerial ability of the farmer
4) Basis for credit acquisition and management
5) Guide to better management and future' decisions
6) Basis for research
7) Basis for policy formulation

PROBLEMS AND DIFFICULTIES IN FARM ACCOUNTING

1) Subsistence nature of farming
2) Triple role of Indian farmer and difficulties of maintenance, farm manager, farm
labour and family head
3) Illiteracy and lack of business awareness
4) Complicated nature of agri-business
5) Inadequate extension service in making farmers record oriented
6) Non-availability of suitable and simplified farm record books under Indian conditions
7) Lack of record consciousness
8) Fear of taxation

BENEFITS OF FARM RECORDS

The benefits of maintaining farm records are presented below:
1. Planning: Identification of defects in the existing organization of farm business is the first
step in farm planning. Analysis of farm records helps in diagnosing the omissions in the
current plan. It also provides data required for farm planning.
2. Management: Maintenance of farm records inculcates the business outlook as well as
better insight into the working of farm business. Systematic recording of farm business
transactions helps the farmer in knowing the strengths and weaknesses of the business. Once
weaknesses are brought into fore, the recurrence of the same can be avoided in future and
thus leading to the improvement in the management.
3. Farm Returns: Farm records help to check the unproductive expenditure and identify
profitable enterprises. Besides, the gap between current income and potential income can be
examined, as records are the sources to know the present income on the farm. Once this gap
is identified, suitable corrective steps can be taken to improve the returns on the farm.
4. Research and Government Policies: To conduct research we need precise data on costs and
returns. Similarly for formulation of various programmes for betterment of agricultural
sector, the Government also needs authentic data. Well maintained records provide required
information for the researcher and the Government.
5. Credit: The records provide information on the income generating capacity of the farm and
thereby indicates the credit worthiness of the farmer. This enables the farmers to get required
credit from the financial institutions.
6. Input Management: Records indicate the requirement of various inputs and input services
in advance so as to organise the farm business smoothly.

LIMITATIONS IN THE MAINTENANCE OF FARM RECORDS

1) Illiteracy: Majority of the farmers does not have the reading and writing abilities as a
result they do not show any interest in the maintenance of records.
2) Small Size Holdings: Small farmers do not feel it is worth to maintain the records in
view of meagre amount of turnover.
 3) Fear of Taxation: Farmers are apprehensive of the taxation on their income and so
they do not like to record the particulars of income.
4) Complicated Nature: Majority of the farmers are used to memorize the various
transactions of farm business from time immemorial and they feel that it is
cumbersome to maintain records, for some knowledge of accounting is required to
maintain the records even the farmers are literate.
5) Nature of Farming: Farming is a laborious work which involves not only the physical
work but also mental work. Farmer works on the farm from morning till evening,
therefore he does not feel comfortable to sit and write all the business transactions that
have taken place on that day.

RECORDS MAINTAINED ON AN AVERAGE FARM

An average farmer requires the following records to be maintained for efficient management
of the farm.
1. Land use records.
2. Permanent deadstock register.
3. Farm livestock records.
4. Farm labour records.
5. Input records.
6. Feed records.
7. Crop production and disposal records.
8. Livestock production and disposal records.
9. Input and feed stock register, and
10. Log book.

Types or Farm Records

Farm records system consists of three parts:
1) Physical farm records
2) Financial farm records
3) Supplementary farm records

1. PHYSICAL FARM RECORDS

To implement the financial records and financial decisions, the physical data recording
concerning the farm and its performance are essential. The uses of farm records, earlier assets
are: to check performance of enterprises, for controlling the business; to aid the analysis of
past results, to detect weaknesses and strengths to guide future decisions; and to provide
planning data. As the prices of both outputs and inputs are subject to continuous fluctuations,
the physical data recording is in many ways of greater importance than the financial
information. The following are the physical records that should be kept.
a) Farm map
b) Land utilisation records
c) Production and disposal record for crops, livestock, poultry and others
d) Labour records
e) Machinery use records
f) Feed records
g) Stock and store register

2. FINANCIAL RECORDS
In order to provide information regarding the profitability of the whole farm business over a
given period, the financial records are important to be maintained. They enable the analysis to
be carried out to reveal the economic strengths and weaknesses of the farming system, and to
provide data to help in the preparation of revised plans and budgets. The following financial
records should be kept
1) Farm inventory
2) Farm cash or farm financial record
3) Classified farm cash account and annual business analysis
4) Capital asset and sale register
5) Cash sale register
6) Credit sale register
7) Purchase register
8) Wage register
9) Funds borrowed and repayment register
10)Farm expenses paid in kind register
11)Non-farm income record

3. SUPPLEMENTARY RECORDS
a) Sanction register
b) Auction register
c) Rainfall register
d) Hire register
e) Stationary register

Farm Inventory Analysis

Farm inventory is a list of all the physical properties of a business along with their
value at a specific date. It is a complete list of fanner's assets with their valuation at a point of
time.
An inventory repeated at another point of time would account for the depreciation or
appreciation of the assets and their sale or purchase during the period between the
inventories.
The difference between two inventories reflects the profit or loss during that period.
Usually the period refers to an agricultural year and the inventory at the beginning of the year
is compared with that at the end of the year.
Assets: An asset is a physical property or intangible right owned by a business or an
individual that have a value.
Assets are classified into the following types:
(1) Fixed assets, (2) Working assets, (3) Current assets.
1) Fixed Assets
They are of the nature that it is difficult to convert them into cash to meet any current
obligations. For example land, buildings and other long lived inventory structures.
2) Working assets
They are more liquid than fixed assets, such as farm machinery and equipment, etc. for
example, breeding and producing livestock. These resources will ordinarily be worn out in
the normal process of business. Their value may be regarded as being transferred slowly to
the products of the farm operations.
3) Current Assets
These consists of cash on hand, bills recoverable, crops, feed on hand, livestock that is or will
shortly be in condition for sale. Current assets may be considered as assets which in the
normal operation of the business will be liquidated within the accounting year.

Methods or Valuation
1) Cost minus depreciation
2) Cost or market price whichever is lower
3) Net selling price
4) Replacement cost minus depreciation
5) Income capitalisation method

1) Cost minus Depreciation

This method assumes that the purchase price was an approximation of the value of the asset
and its value in subsequent years can be determined by subtracting a depreciation allowance
from its cost. It is commonly used for working assets like machinery and breeding livestock.

2) Cost Or Market Price

Valuation is estimated at the cost or the market price, whichever is lower. This method is
commonly used for valuing purchased farm supplies.

3) Valuation at Net Selling Price

This means the price which could probably be obtained for the asset, if marketed, less the
cost of marketing. This conform most closely to the present worth. This method is used for
those items that are held primarily for the sale: crops or livestock produced for the market.
Net selling price = market price less the selling costs.

4) Valuation By Replacement Cost Minus Depreciation

This method is to evaluate the assets at what it would cost to reproduce them at present
prices, and under present method of production. For example, long lived assets, like
buildings. This method will guard against under-valuation, but may not ensure against over-
valuation.

5) Valuation By Income-Capitalisation Method

This method is appropriate for the farm assets, whose contribution to the income of the farm
business can be measured and which have a long life. The capitalisation formula
V = I/r
can be used for this purpose, where V = value in rupees; I = constant income over infinite
number of years in future (net income per year) and r = rate of interest.

Depreciation: The decline in value of capital equipment due to wear and tear is called
depreciation. It is caused by two factors-time and use. As depreciation continues, the
serviceability and value of the asset diminishes.

Methods of computation of depreciation

1) Straight line method
2) Annual revaluation method
3) Diminishing balance method
4) Sum of the year-Digits method (or) Reducing Fraction method
5) Compound interest methods
a) Sinking fund method
b) annuity charging method
6) Insurance policy method
7) Machine hour-basis method