Farm Management Lecture PDF

FARM Management Introduction  Farm Management Farm management ➔ making and implementing decisions involved in organizing and operating a farm for maximum production and profit. Farm management draws on agricultural economics for information on prices, markets, agricultural policy, and eco...

FARM Management Introduction  Farm Management Farm management ➔ making and implementing decisions involved in organizing and operating a farm for maximum production and profit. Farm management draws on agricultural economics for information on prices, markets, agricultural policy, and economic institutions (leasing and credit)  What decisions need to be made? What to produce? What quantity to produce? What kinds and amounts of resources to use? What technology to use? When to buy and sell? How to finance?  Who makes the decisions? Farm Operator Spouse Landlords Farm managers Farm Advisors Government Financers Farm owner  Major Areas of Farm Management Planning Organizing Directing (leading) Staffing Controlling  Decision Making Steps Define the problem List Alternatives Analyze alternatives Select best alternatives Act on decision Evaluate  Good Managers vs. Bad Managers Takes Pride Careless Neat Unorganized Plans ahead shoots from the hip – no care about consequences good record keeping no records has the expertise outdated methods  The Economics of Effective Mgt Identify goals and constraints Recognize the nature & importance of profits Understand incentives Understand markets Use marginal analysis Recognize the time value of money  1-9 A. Identify Goals and Constraints Sound decision making involves having well-defined goals. Leads to making the “right” decisions. In striking to achieve a goal, we often face constraints. Constraints are because of scarcity.  Agriculture Program Goals To improve the quality of life for the Gomao Afransi, Central Region, and nation To contribute to the goals and objectives of SHS by being an integral component of the school feeding program To develop agricultural competency needed by individuals engaged in or preparing to be engaged in agricultural occupations  Program goals To develop leadership, communication and interpersonal skills to enable an individual to obtain employment and to be successful in that employment To develop an awareness and literacy of the agriculture industry in all members of the community  1-12 B. Economic vs. Accounting Profits Accounting Profits Total revenue (sales) minus dollar cost of producing goods or services (accounting cost). Reported on the firm’s income statement. Economic Profits Total revenue minus total opportunity cost.  1-13 Opportunity Cost Accounting Costs The explicit costs of the resources needed to produce produce goods or services. Reported on the firm’s income statement. Opportunity Cost The cost of the explicit and implicit resources that are foregone when a decision is made. Economic Profits Total revenue minus total opportunity cost. It is smaller than accounting profit  Economic versus Accountants How an Economist How an Accountant Views a Firm Views a Firm Economic profit Accounting profit Implicit Revenue costs Revenue Total opportunity costs Explicit Explicit costs costs Copyright © 2004 South-Western  1-15 C. Understanding Firms’ Incentives Incentives play an important role within the firm. Incentives determine: How resources are utilized. How hard individuals' work. Managers must understand the role incentives play in the organization. Constructing proper incentives will enhance productivity and profitability.  1-16 D. Market Interactions Consumer-Producer Rivalry Consumers attempt to locate low prices, while producers attempt to charge high prices. Consumer-Consumer Rivalry Scarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods. Producer-Producer Rivalry Scarcity of consumers causes producers to compete with one another for the right to service customers. The Role of Government Disciplines the market process.  1-17 E. Marginal (Incremental) Analysis Control Variable Examples: Output Price Product Quality Advertising R&D Basic Managerial Question: How much of the control variable should be used to maximize net benefits?  F. Recognize the time value of money Discounting: The concept of discounting is concerned with the fact that costs and benefits arising in future years are worth less to us than costs and benefits arising today.  1-19 Time Value of Money Conti... Present value (PV) of an amount received in the future is the amount that would have to be invested today at the prevailing interest rate to generate the given future value. The PV of a future value FV received ‘n’ years in the future when the per-period interest rate is “i”: FV PV = (1 + i ) n  Example The present value of 100 GHC in 10 years if the interest rate is at 7% is? FV PV = (1 + i ) n 100 100 PV = = = 50.83GHC (1 + 0.07 ) 10 1.9672  1-21 Net Present Value NPV is a financial tool that takes the discounted cash flows associated with a project and compares that to the investment to be made for the project. Suppose a manager can purchase a stream of future receipts (FVt ) by spending “C0” dollars today. The NPV of such a decision is FV1 FV2 FVn NPV = 1 + 2 +...+ n − C0 (1 + i ) (1 + i ) (1 + i ) Decision Rule: If NPV < 0: Reject project NPV > 0: Accept project  Assignment I A corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1–6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 1–6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year:  Solution Year Cash flow Present value T=0 -$100,000 T=1 $22,727 T=2 $20,661 T=3 $18,783 T=4 $17,075 T=5 $15,523 T=6 $14,112  NPV Cont’d The sum of all these present values is the net present value, which equals $8,881.52. Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project if there is no alternative with a higher NPV.  Quiz I A potential entrepreneur is trying to decide whether to open a new health centre. She presently makes GHC 35,000 per year as an aerobics instructor and will have to give up this job if she opens the new health centre. If she chooses to open the centre, it will cost her GHC 200,000 per year in rent and other operating expenses. a. What are her accounting costs? b. What are her opportunity costs? c. How much would she need to make in revenues to earn positive accounting profits? Positive economic profits?