Farm Management

AGEC 0243: Farm Management and Accounts
AGEC 0243
FARM MANAGEMENT AND ACCOUNTING
LECTURE NOTES
PREPARED BY MR. DANIEL KYALO WILLY
COURSE INSTRUCTOR
DEPARTMENT OF AGRICULTURAL ECONOMICS AND BUSINESS

MANAGEMENT
EGERTON UNIVERSITY
DECEMBER, 2008.
COURSE OUTLINE
1. INTRODUCTION
Definition of terms, decision making process, scope and functions of
management.
2. Economic Principles and Concepts relating to agriculture.
- Enterprise selection and combination. The marginal principle, Law of
Diminishing Returns, Marginal Rate of Substitution, Equimarginal
Returns, Opportunity cost.
3. Farm Layout and rotation programme.
4. Collection and analysis of farm management data; uses and sources of data,
Presentation of results.
5. Farm Planning and Budgeting.
- Needs for planning and steps in planning.
- Farm budgeting analysis.
- Partial budgets
- Complete budgets
- Break even analysis.
- Program Planning and Linear Programming (LP)
6. Basic farm Accounting
7. Measures of Farm Performance.
- Financial and
- Profitability Measures.
References
1. Johnson, D.T. (1990). The Business of Farming. A Guide to Farm Business
Management in the tropics. Macmillan Publishers (Ltd)
2. Kay, R.D. (1981) Farm Management. McGraw Hill
3. Erven, B Foster L (1981) – Foundations for Managing the Farm Business.
Grid
Publishers Inc. Ohio.
4. Mix, J.S. Benards, C.S (1979). Farm Planning and Control. Cambridge
University Press, London.
5 Upton, M (1978) – Farm Management in Africa. Oxford University Press.
6. Herbst J.H (1983) – Farm Management: Principles, Budgets and Planning.
Stripes Publishing Co. Champaign Illinois.
© 2008 Daniel Kyalo Willy i

TOPIC 1: INTRODUCTION TO FARM MANAGEMENT PRINCIPLES
DEFINITION OF TERMS
FARM: Its productive resources under the control of one farmer or farm-family. It
includes one or more plots of land and possibly several kinds of livestock.
MANAGEMENT: It describes the function of taking decision about how productive
factors should be used in carrying out these decisions.
FARM MANAGEMENT
i) Is the decision making process whereby limited resources are allocated to a
number of production alternatives to organize and operate the business in such a
way as to attain some objectives.
ii) Is a science which deals with the proper combination and operation of production
factors including land, labour and capital and the choice of crop and livestock
enterprises to bring about a maximum and continuous return to the most
elementary operation unit of farming.
iii) Is the discipline that deals the decisions concerning the allocation of the scarce
productive resources available to the farmer with the aim of realizing targets or
goals.
GOALS OF FARM MANAGEMENT
1. Profit maximization –agriculture is a business and the main objective of a business is
to earn money, therefore every farmer would want to maximize profits.
2. Attaining a particular output level or business size e.g. a farmer would want to
maximize the output from his/her farm or get high yields per of land
3. Attaining subsistence production –i.e. for domestic households consumption
4. Preserving a certain amount of time for leisure activities in African countries and
most developing countries its hard measure leisure time or the number of hours
allocated for leisure.
5. Business growth –expansion of business to enable a son to join in later than to make
maximum profits now.
6. Business survival / Security avoidance of risk to ensure survival of the business may
be important so stable profits may be more desirable than maximum average profits.
7. Maintaining stable income overtime.
8. Prestige or personal satisfaction: potential profit is often lost in order to maximize
satisfaction for example, a simple easily controllers system with familiar, preferred
© 2008 Daniel Kyalo Willy 1

enterprises may be chosen to give an agreeable way of life that leaves adequate time
for public affairs or leisure e.g.
o Muslims are unlikely to breed pigs.
o Apostles/ Christian are unlikely to grow tobacco, however profitable it may be!
o The latest machine may be bougled not because it will raise income or reduce cost
because a neighbour has one.
o A breeding herd of cows may be kept because it is nice to look at and the last litre of
milk may be extracted from it, irrespective of cost but because of the prestige of
having the highest yielding herd in the district.
Role or scope of farm management

We look at farm management in two ways: management as a problem solving activity
and management as a decision making activity.
1) Management as a problem solving activity
Many farm management problems have to do with either of the following three
types of economic problems.
(i) How much to produce: Production and revenues depend on types and input levels
used. E.g a manager is faced with problems of determining how much inputs to use
(especially in the process of trying to maximize output while minimizing costs.)
(ii) How to produce: Many agricultural products can be produced with a number of
ways. e.g crops can be produced with large machinery and the little labour or small
machinery and little labour or select the appropriate combination of inputs which will
minimize the cost of producing a given quality of some commodity.
(iii) What to produce: This problem involves selecting the combination of crops and
livestock to be produced. Should the farm produce only crops, or only livestock or
some combination? Which crops or crop rotation? Which livestock? The manager
must therefore select among the alternatives that combinations which best meet some
goal.
2. Management as a decision making activist:
Every production decision with which a farm manages in confronted relates to one or
a combination of these three problem types. They are economic problems and have
three characteristics
(i) Goals or objectives to be attained:

A manager’s first job is to establish goals and objectives for the business. Without
goals, there is no way to measure the results of management decisions or to make
proper decisions.
- Goals provide guidelines for decision making
- Goals provide yardstick which can be used to measure success.
(ii) Limited resources:
A manager must consider the resources available for attaining the goals which have been
set. Limits are placed on goal attainment because most managers are faced with a limited
amount of resources. In a farm business, goal attainment is confined within some limits
set by resource may change over time, but they are never available (unlimited) amounts.
Expertise or management skills in another resource
(iii) Alternative uses:
If the limited resources could only be used to produce one agricultural product, the
manager for it would be much easier. The usual situation allows the limited resource to be
used in several different ways to produce each of a number of products. In other words,
they manager is faced with a number of alternatives uses for the limited resources and
must make decisions on how to allocate them among the alternatives to meet the goals.
e.g land- you can allocate it to livestock, crops e.t.c there’s that competition for this
resources among the enterprises.
DECISION MAKING PROCESS

The process of making a decision can be formalized into a logical orderly series of steps.
i) Identify or defining the problem.
ii) Collect relevant data, facts and information.
iii) Identify and analyses alternative solutions.
iv) Make the decision: that is selecting the best alternatives.
v) Implement the decision.
vi) Observe the result and hear the responsibility for the outcome.
(i) Problem definition
Any rational manager begins by realizing that he/she has a problem. A farmer can
recognize that he/she has a problem when he/she is faced by conflicting facts. E.g.
when farm expenditure is higher than revenue. A problem can generally be
recognized by the equation. What is ≠ what ought to be.
(ii) Collect relevant data, facts and information:

A good manager must also be a good observer. He must have alternative solutions to
solving problem at hand. He must therefore attempt to have access to data which will
help him to solve his problems. The data collected must be analyzed.
(iii) Identify and analyze alternatives:
Once the relevant information is available the manager can begin listing
alternatives. Which are potential solutions to the problem.
Each alternative should be analyzed in a logical and organized manner to ensure
accuracy and to prevent something from being overlooked.
(iv) Making decision
After all the pros and cons of each alternative are weighed, one may appear to be
definitely better than the other. The one showing the greater increase in expected
profit would normally be selected.
However, this selection is often complicated by the uncertainty about the future e.g.
about future prices. Therefore if several alternatives have merely the same potential
effect on profit, the manager must then access the chances or probability that each
will have the expected or identified income and the risk associated with it.
(v) Implementing the decision
Decision is never formalized until they are implemented and of course doing nothing
is an alternative. However, the manager who decides to do nothing should do this
after enough analysis of the problem to be sure that this is the current decision.
(vi) Responsibility bearing
The manager must be willing to accept responsibility for his decision. Many people
are not willing to accept this heavy responsibility which explains why some
individuals find it so difficult to make a decision.
Classification of decisions
Decisions are classified according to a number of characteristics. i.e
a) Importance
Given the many decisions made by farm managers, some be more important than
others. Importance can be measured in several ways but most common would be in
terms of the number of shillings involved in the decision. i.e the cost of making a
decision
b) Magnitude of the potential gain/loss

Decisions involving a few shillings might be made routinely with little time spent
gathering data and proceeding through the steps in the decision making process.
Decision involves large amounts of capital and potential profits/loss need to be
analyzed carefully.
c) Frequency
Some decisions might be made only once in a life time such as decision. to choose
farming as a profession. Other decisions must be made daily i.e livestock feeding
times, watering. Such frequently made decision should be based on some rule. So,
whether by rule/other method used, the manager must be aware of the cumulative
effects of a small error in these decisions.
d) Imminence (Intensity)
A manager is often faced with making some decisions before certain deadlines/very
quickly to avoid a potential loss. Other decisions may not have alternatives and may
have little or no penalties after delaying the decision until more information is
obtained and more time spent in analyzing the alternatives.
When prompt action is required the manager may have to proceed through the
decision making steps quickly and without complete information. E.g An army worm
outbreak on crops requires prompt decisions to avoid large potential loss. -An animal
disease outbreak (foot and mouth e.t.c) requires same action (Quarantine).
e) Revocability
Some decisions can be easily reversed if observation indicates that the 1st decision
wasn’t correct, other decisions may be reveled only at a very high cost e.g The
decision to dig a borehole, construct new farm building. Once the decision is made to
go ahead, the choice is either to use/abandon them altogether. It may be
difficult/impossible to recover the money invested.
f) Alternatives available
Some decisions have only two possible alternatives i.e. Yes/No. The manager may
find this decision easier unless time consuming than other which have a large number
of alternatives solutions/courses of action.
Where a large number of alternatives exist, the manager may be forced to spend
considerable time. Identify alternatives and analyzing each one.
Function of management
There are fundamental functions namely:
- Planning

- Organizing
- Directing
- Controlling
- Coordinating
1. Planning
Is the determination of the intended course of action for the farm business intended
course of action include expectations for the future.
- In planning the goals and objectives. Must be clearly determined because they
provide the general direction for further decisions.
- Plans vary by length of planning horizon, Problem area and Scope
A plan may be as short as a period of one day and a future period of time
There are plans for each of the farm management areas as
- Production e.g when to plant, plough e.t.c
- Personnel e.g number of concerns to perform a certain duty
- Financial e.g how much finances are required and source
- Marketing e.g when to sell your calf. (age of disposing calves, culling age,
means of transport to marketing e.t.c.
Characteristics of a good plan
1. A good plan should be based on clear understanding of the attainable goals

and objectives of the farm business.
2. Should reflect the strengths, weakness and interests of the farm operator.
3. Both quality and quantity of the available resources should be taken into
consideration.
4. Should have information on the past performance of the farm and similar
farms within the community –for comparison purposes
5. Should have expectations for the future. E.g future sales volumes prices e.t.c
6. Should have short, intermediate and long run horizons i.e. different plans
have different periods to be achieved– some plans are short term others are
long term.
7. Should allow assessment of the performance methods of evaluating farm
business.
2. Organising

A farm manager executes the plan by organizing. In organizing, decisions are made
about coordinating tasks, people and the work place in general
- The objective of organizing is to have people efficiently and effectively
execute their tasks/duties.
- When organizing the manager has to deal with tasks are performed and the
interrelationships develops among people and groups of the people in their
performance of duties.
3. Directing
This function refers to leading, motivating and guiding. Directing involves making
decision to put plans into action. In this function the manager works through people to
carry out the plan. The manager must lead, supervise, communicate, motivate and
develop staff.
4. Control
Control function provides for observing the result the implementation plan to see if
the specified goals and objectives are being made.
Many things can cause a plan to go off-traffic e.g change in prices (since price is
uncertain)-both input and output prices.
- Control requires a system of regular checks on the plan and monitoring its
process and result against the established goals.
- To control first you have to establish the standards of control
- Measure the performance e.g compare yields, cost of production and compare
that performance with the set standards, if there’s any problem, you take
corrective action. e.g when using only pasture to feed livestock it gives this
amount of milk. But when you supplement pasture with concentrates it gives a
higher amount of milk e.t.c.
5. Coordinating
It is an effort to ensure that all bits and pieces fit together
i) The manager should interpret goals and methods to work.
ii) Keep in touch with the employees and provide force flow of information.
iii) Set up a climate of success. Is setting up this climate of systems, there are some
principles that you should follow these include
The principles of success include:
- Set up a good example as a manager.

- Seek participation of all firm coordinates or those who manage the

different enterprises
- Be good and success oriented and centered.
- Give credit and blame as necessary. Blame in privates and credit in
public.
- Be fair consistent and honest
- Inspire confidence and encouragement
TOPIC 2: ECONOMIC PRINCIPLES AND CONCEPTS RELATING TO

AGRICULTURE
Knowledge of economics provides a manager with a set of principles and rules for
decision making which are useful when making plans to organize and operate a farm
business.
Definition of terminologies
Total physical product (TPP): This refers to the total output (Y) resulting from
using a certain level of variable input with all other inputs fixed.
Y = ƒ(X1 X2 X3…….Xn)
Average physical product (APP): This is the average amount (Y) produced by a unit
of variable input X.
Marginal physical product (MPP) refers to the added value of output produced by
an additional unit of variable input. Marginal physical productivity is the additional
amount of output (Y) produced by all additional unit off variable input
Illustration
Table 2.1 Maize yield responses to varying amounts of N fertilizers.

Units of fertilizers(Kg) TPP MPP APP

0 0 0
10
1 10 10.0
13
2 23 11.5
15
3 38 12.7
16
4 54 1.5
16
5 70 14.0
15
6 85 14.2
14
7 99 14.1
14
8 110 13.8
7
9 117 13.0
3
10 120 12.0
-2
11 118 10.6
Note
When the price per unit is multiplied by their physical quantities we obtain
Total Revenue (TR) = TPP * Price/unit
Marginal Revenue (MR) = MPP * Price/unit
Average Revenue = APP * Price/unit
For costs Total cost TC includes both production (variable) and fixed costs.
Marginal cost (Mc) is the cost of each additional unit of input
Average cost is total cost of the input
The Marginal Principle

A manager is often interested in what changes will result from a change in one or
more factors under his control. The term “Marginal” is used to refer incremental
changes, increases or decreases which occur resulting from a small marginal change
in some factor. Example from Table 2.1 is that the increase in output resulting from
an additional 1 kg of N/Acre is 13 Kgs, 15 Kgs, e.t.c.
The Law of Diminishing Returns

The term “Diminishing Returns” relates to physical production. The value of physical
production begins to decline or diminish after some point as more of the variable
input is used. The law states that as additional units of variables input are used in

combination with one or more fixed inputs, after a point, each incremental unit of the
variable input produces less and less additional output.
y
TPP
INFLECTION
POINT
STAGE
STAGE III
II
STAGE
I
MPP
APP
APP
MPP
Figure 2.1 Stages of Production
The above production functions can be divided into three stages.

Stage I: This lies between the origin and the point MPP crosses APP. In this region
APP is increasing hence MPP must be greater than APP. In this stage any additional
units of input causes APP to increase, however, it is irrational to produce at any point
in this region because additional input units always yield higher output.
Stage II: In this region, MPP is positive but lies below APP. MPP decreases as more
units of input are added. Also APP and TPP are increasing but at a decreasing rate
(diminishing return). Despite the diminishing returns, inputs added result in
additional output.
The most profitable point of production lies within this region, but the exact point
can be determined only if input and output prices are known.
Stage III: TPP and APP are declining but MPP is negative. Since additional
quantities of input reduces total output, it shows that the more the manager spends on
inputs the less the output he gets. It is rational to produce in this region.
The Marginal Rate of Substitution

This measures the rate at which one factor substitutes for another. Thus the rate at
which factor X2 substitute for factor X1 is the amount of X1 which is replaced by one
additional unit of X2 without affecting production. The rate of substitution might
possibly be constant, decreasing or increasing.
a) Constant rate of substitution
X2
S Isoquant
X1
The slanting line is called an isoquant and shows all the possible combinations of
factors X2 and X1 that may be used to produce a given amount of product.
and [ ]
The MRS is the same at R and S as well as on anywhere along the line.

b) Decreasing (Diminishing) Rate of substitution

X2
X1
In diminishing rate of substitution the more factor X2 is substituted for X1, the less of
factor X1 that is replaced by each additional unit of factor X2. The is smaller
at point Q (where more X2 and less of X1 is used) than at J, implying a diminishing
MRS. Similarly, is greater at Q than at J.
c) Increasing MRS
X2
X1
The more factor X2 is substituted for factor X1 the more of X2 has to be sacrificed.
The Law of Equi-Marginal Returns
This principle tells us to allocate a resource among several alternative uses in such a
way that the marginal returns are equal in all cases. To calculate this level of
investment, we need to know the variable costs, determine the marginal cost and the
product price to calculate for MR.
Opportunity Cost
The opportunity cost of using a factor in one way is the return forgone from using it
in its most profitable alternative use. Let us say you want to find the opportunity cost
of using one acre of land in producing oats, which in non marketed. You can get a net
return of 8000/= Acre from using it on maize production, 12000/= from soya bean

and 9000/= from wheat. The opportunity cost of using the acre of land on oat
production rather than soya beans is 12000/= .
Application of the Concepts

a) How to produce
The question of determining the level of a variable input, and therefore the level of
output, which gives the maximum profit is closely linked to the law of diminishing
returns. The optimal point can be found by valuing the total product at different levels
of input and plotting the total revenue (TR) and total cost (TC) on the same graph.
Because MC is assumed constant, TC is represented by a straight line.
Revenue
Cost
TR
TC
The maximum vertical distance

between TR and TC curves gives
the point of maximum profits
Inputs
Since profit equals TR-TC, maximum profit is obtained at the point where the vertical
distance between the TR and the TC is at its greatest.
The point of maximum profit can also be found by considering marginal revenue and
marginal cost
Revenue /
Cost
C AR
MC
© 2008 Daniel Kyalo Willy 13 A' C' B Inputs

MR
The rational area in which to produce is between A' and B. the AV Revenue is
maximum at point A and MR reaches zero at point B. Up to input level A', Average
profit per unit of input is still increasing; therefore the total profit must obviously still
be rising. Beyond point B extra costs are being incurred for a lower total output, the
MR becoming negative beyond this point, which is obviously uneconomical.
The optimum level of input use is at C' where MR=MC at point C, since up to this
point the extra revenue obtained from the last unit of input exceeds the extra cost of
that input, and beyond that point the extra revenue produced is less than the extra cost
in curved to obtained it.
b) How much to produce

in the deciding how much to produce of a particular produce the principle of
substitution is applied . This is concerned with factor-factor relationships, and is used
to determine the optimum combination of variable resources optimum to produce a
given output.
Foliar (X1) N (X2)
9 2
6 5 A
5 7 B
3 10
1 14
Taking points A and B, between which fertilizer application is increased from 2 – 5
Kgs/ Ha, the same production as at A can be achieved by applying 3 Kgs more of N
to 1 Litre of foliar less. This means the MRS of 1 Kg of N for 1 liter of foliar is – 0.33
These relationships are very important for farm planning decisions if both factors are
variable or if both are limiting
To determine, the least cost combination, i.e the point at any given level of output a
graph showing isoquants must be drawn.
Foliar
B
A
3500
2950
2500
N
The straight lines that join the foliar and N lines are isocost lines: They show the same
cost combination for both factors and also refer to the budget constraint. At the point
where the isocost line touches the isoquant (e.g. A and B) is the optimum combination
of foliar and N. This is the least cost combination point.
c) What to produce.
The following principles and concept are relevant to the optimal choice of enterprises
on a farm.
• The principle of substitution
• Complementary and supplementary relationships
• The law of equity marginal returns
• The principal of proportional costs.
For product substitution
The principles states that “a manager should choose from each group of competing
enterprises relevant to his / her circumstances that will provide him with the best net
return of the farm as a whole. e.g. A farmer with the given resources with regular
labour and capital can produce either cabbage potatoes on 40 ha of his land .
Cabbages yields 35 tonnes /ha and potatoes 25 tonnes /ha. He can thus produce 1400
tonnes of cabbages or 1000 tonnes of potatoes or any combination of the two. The
price will determine the most profitable choice.
Complementary (for complementary relationships)
Sometimes an increase in one product may actually increase the total production of
the other through some beneficial effects over a limited range e.g the use of Lucerne
may increase the yield of another crop if planted in rotation e.t.c (for nitrogen to the
soil)
TOPIC 3: FARM LAYOUT AND ROTATION PROGRAMME.

1. The rotation programme will depend on the enterprises selected. Should be such
that it will maximize long term profits on the farm by providing a cropping pattern
and sequence which will not only maintain but also improve productivity of land. A
good rotation programme will include a grass and hence some livestock enterprise.
Land tenure consideration freehold/leasehold/communal-pastoralism is relevant term
use of land.

The farm/ranch layout

A. What is a farm layout? Is the location and arrangement of the farm building roads
fields, water systems, soil conservation structures etc. on the farm and in relation to
one another?
B. Importance of farm layout. Has a profound impact on the efficiency of land,
labour and machinery utilization. A well planned layout should provide for maximum
utilization of these resources leading to maximum farm profit. a farm layout could
lead to considerable:
• Wastage of time.
• Wastage of labour effort in walking etc.
• Wastage of machinery time.
• Wastage of land.
C. Planning the farm layout.
i) Select the farm enterprise(s)
ii) Draw up a suitable rotation programme in terms of;
a) On economic criteria.
b) Sequence of crops and grass leys.
c) Length of rotation in years to complete the rotation cycle/rotation grazing cycle etc.
iii) On suitable map of the farm, mark out a suitable farm layout. (This is where a
surveyor’s skill comes in).
iv) Mark out the farm layout on the ground. Distances could be paced out or survey
equipment be used depending on the degree of accuracy desired.
D. Factors to consider in planning a farm layout:
i) Layout: field layout should satisfy the following if it is to be efficient:-
a) Soil and water conservation: Fields should be demarcated according to the natural
lay of the land and in such a way as to minimize soil erosion. They should be long a
long the contour to encourage cultivation a long the contour. Field boundaries should
not be erosion water ways, and roads should run as far as possible along the contour
to prevent erosion.
b) Size and shape of the fields: Particularly where machinery is to be used on a large
scale, fields should be as large as possible for efficient ploughing etc. Rectangular
fields are the best for efficient machinery operation. In addition, the field should be as
rectangular as possible in shape to ensure maximum utilization of the land (odd

corners are difficult to plough etc.) and minimum turning and unnecessary slowing
down of machinery in operation.
c) Number of fields: For a smoother rotation programme it is necessary the number
of fields should correspond with the length of the rotation in years.
The number of fields should be to equal or be a multiple of the number of years in
rotation if rotation programme is to he carried out smoothly. e.g. eight years in the
rotation. Eight, sixteen, twenty four, e.t.c fields.
d) Uniformity of fields: Fields should be as uniform as possible in; topography,
drainage. Fertility etc. so that any treatment e.g. fertilizer application etc) given to
each field can be applied to the whole field uniformly. Crop uniformity which could
be important in ensuring uniformity of ripening and proper timing of harvesting is
also ensured.
e,) Economy in fencing: Permanent fences should only be erected where it is strictly
essential. Good field layout should avoid too many permanent fences. Where possible,
temporary fences. E.g. electric fences should be used.
f) Efficiency of the livestock system: All pastures should be easily accessible and
where pasture does not adjoin the homestead, lanes should be provided for walking
cattle to the pastures. The lanes should not be so narrow that they turn into tracks and
erosion waterways. The livestock buildings—dairy barn and feed stores-as well as
holding yards should be such as to minimize walking or transportation of any
materials.
Rule of thumb: 4 week grazing -2 weeks recuperation or rest for pastures. The
manager’s eye on grass is important.
ii).Location of the farm buildings, roads and water systems:
Farm building s should be as central as possible to minimize transportation and
increase farming efficiency.
a) As near the center as possible to ensure accessibility of each field. Where possible
each field should be continuous to the homestead.
b) Should (buildings) be easily accessible from the main roads as possible. There may
be advantage in locating the farm stead near a major road.
c) Buildings should be located in a suitable place-well drained but where possible the
least fertile part of the farm.

d) Roads should be so located as to ensure ease of accessibility of every part of the

farm while ensuring that roads do not take unnecessarily much land or become
erosion waterways.
e) Water system should be such as to ensure adequate supply of water for domestic
and livestock use at least cost.
• Minimum of piping etc.
• A trough between every two fields.
f) The arrangement of buildings in relation to one another should be such as to
minimize unnecessary walking or transportation-every 10 meters of unnecessary
walking between one building and another means 22kms. a year for each daily round
trip. Also the arrangement should facilitate free flow of cattle, materials and products
being loaded etc.
iii). Flexibility: -the layout should be as flexible as possible so that changes are easily
introduced as necessary. This can be ensured by avoiding (a) permanent hedges or
fences inside the farm (b) completely permanent structures e.g. boreholes, roads,
watering points, troughs, dip/spray race.
TOPIC 4: COLLECTION AND ANALYSIS OF FARM MANAGEMENT DATA

Uses of farm data
1. To describe existing farming systems and to estimate inputs and outputs, cost
and returns. Production data is needed when choosing between alternative systems of
land tenure, for fixing the price of cash and for estimating the benefits from
agricultural credit schemes. An understanding of existence farming systems is
necessary to suggest directions for future technical and economic research.
2. For planning changes in existing systems, standard production data helps
plan or analyze the effects of allocation resources. For extension workers to judge
whether crops or livestock are yielding as they ought, products standard are needed as
a basis of judgment.
3. For measuring the effects of changes after they have been made. Investigation
may be aimed at comparing results obtained in practice from different alternative
products and methods of production. Data for these purposes may be obtained from
three main sources namely technical experts, case studies or farm surveys.

The Data needed

The information needed can be listed in four broad groups:
1. Descriptive materials on the pattern of farming. This will include information
on what is produced and the methods of production.
2. Input - out put data in physical terms. These include quantities of resources
used and physical products obtained. Inputs and outputs must be measured
over a specific period of time, usually 1 year for annual enterprises. Where
much of the output is consumed by the farm family it is necessary to record
products consumed as well as those sold.
3. Value placed on inputs and outputs. Market prices are generally used as means
of evaluating inputs and outputs i.e. the cost of inputs and outputs is
determined by the markets prices.
4. Economic and social constraints: These are actual physical limitations on
certain resource supplies. For instance, the labour force may be restricted to
family labour. It is then necessary to assess what labour supply is available on
average. Social constraint may result from local customers, taboos or mere
preferences which may preclude the productions of certain kinds of livestock
or crop products. In so far as such constraints influence the pattern of
production, they should be included as some of the necessary farm
management data e.g. some vegetables like indigenous vegetables are
associated with women (crops grown by women )etc.
Sources of farm management data
1. Existing sources
a) Farm management advisor who draws information from his/ her local
experience. In particular, offices of the agricultural extension services can provide
information on local farming systems and estimates of inputs and outputs.
Information from individuals is both cheaply and quickly acquired. Where results are
needed rapidly, this may be the only source of data, which is possible to use.
b) Published materials from past research. Here the data may not be directly
applicable to the farms currently under investigation.
c) Field surveys and the best established from is agricultural census. A census
is carried out mainly buy government statistics department and the main types of
information include:

• Crop area – hectares, acres

• House hold size
• Crop yields – kgs /tonners etc
• Livestock counts
1. Technical experiments
Carried out on research stations/even farm trials give precise & accurate data on the
effects of varying certain inputs on a particular crop /livestock under certain specific
conditions. However, the standard management of small experimental plots is much
better than that of small farms. For this reason, technical experiments are likely to
give a biased picture of the inputs and outputs to be found in practice. Further
different pure crop stands while farmers practice mixed cropping.
2. Case studies
This is an investigation of single representative farm. On large commercial farms
where records and accounts are kept for management purpose, each farm may be
treated as an individual case study. The records and accounts can be used to analyze
weakness in the existing system and to provide planning data for the individual farm.
However, a comparison of accounts on different farms in the same environment often
provides useful information on possible ways of increasing individual farm incomes.
Case studies can be provide information on the pattern and methods of production, the
prices of inputs and outputs and on social and economic constraints on existing levels
of output.
3. Surveys
The only reliable way of collecting information relating to a large number of farms of
a particular type is by surveying a representative sample of them. Many kinds of
information on a population of farms and farm families may be collected by a sample
survey. Such information will include:
• Description of farming practices, Production systems, e.t.c
• Farming inputs etc
This can provide a complete set of the information for analysis/ farm management
problems.
Before embarking on a farm management survey it’s desirable to carry out a
pilot survey of a small sample to discover which variables are missing and which are

to be excluded in the main survey of farmers divided into groups/strata using

administrative units /agr-ecological zones or villages. Generally, stratified random
samples give more precise results than a simple random sample.
Organization of a survey
Because farming is seasonal, information for farm management survey must cover at
least one cropping season in order to include a complete sequence of operations.
Certain outputs e.g. milk is produced fairly continuously throughout the year and
consumption occur throughout the year. In order to collect accurate data on these
quantities, they should be recorded as they occur. Otherwise you would rely on
farmer memory recall of past transaction and product activities which are not very
accurate.
Measurement during the survey
Usually necessary to measure areas under crop, since farmers generally don’t know
the area, if they do, the local units of measurements are not standard i.e.( 10 x 20
yards /paces- felt 7ft). It is important to define the quantities of land resources and
define scale of land enterprises etc.
The main disadvantages of surveys are:

i) The cost i.e. it is expensive to carry out a survey
ii) It can be only provide information on existing situation and can’t be used to
measure the effects of innovation before they are introduced to the farms.
Major problems of farm management surveys
1) The average farm
A particular problem with managing farm management surveys in that of finding a
single measure for each characteristics which is typical of the whole sample of farm.
Each farm has different resources; however it is appropriate for sample to be
distinctively similar. Therefore do not sample large & small-scale farms together.
2) Sampling
-Involves making a decision on how to select a sample from the population. The
important factor that influences the choice of sampling is the level of precision
required.
• Increased accuracy involves extra costs.
• Random sampling avoids biased data sets however it’s not possible for farm

management surveys
• A great deal of information must be collected over several cropping seasons.
• Stratified random sample can therefore be used instead.

TOPIC 5: FARM PLANNING AND BUDGETING

A farm plan may mean any contemplated change in the method or practice followed
in farm operation or it may mean the complete re-organization of the farm. Hence a
farm plan is a scheme for the operation and organization of the farm business
4.1 The need for planning
(1) Planning serves as a guide to show what the manager intends to produce, how
much to produce and method of producing .basically, it enables one to choose from
among alternatives.
(2) Planning shows the weaknesses that might be existing in the present management
of the farm. It leads to the exploitation of those areas that might be contributing to the
farm income.
(3) Through planning one can be in a position of developing a rotation program and
then maximize on the utilization of resources in the farm hence exploit economic
potential.
(4) Planning provides for continuity in the farm business from one year to the next.
From the records one can find out what is possible for a particular year.
(5) Planning will show what is invested in the farm business and what are open
opportunities of reaching desired goals.
(6) A farm plan will show viability of a farm to acquire credit.
4.2 Factors to consider when planning

A number of factors need consideration when planning.
1. Land capabilities for different enterprises: Not all land is the same with respect
to fertility, PH, drainage, topography, etc. Therefore one has to find out what is
actually suited to this land.
2. Labor: The situation of labour need attention as it will influence the
implementation of the plan .The availability and quantities of labour are important.
3. Marketing: The marketing arrangement of the products to be produced must be
looked into. Consideration of the availability of the inputs required in the production
must be made. This will decide on how well the inputs will be obtained and also
products marketed.
4. Environment: This includes a wide range of the things such as rainfall sunshine
etc. The effects of these are obvious.

5. Capital availability: May be owned or borrowed. This has to be ensured before

any decision can be made as regards the plan.
6. Transportation: The way the inputs shall be brought to the farm and the products
sent to the market will depend on the transport situation in any given area. Careful
consideration is paramount in this area.
7. The prices of input and outputs: Consideration of these bears a strong influence
as regards of the plan. The aim of farming is to maximize on the revenues and
therefore the cost of inputs must allow revenues to be realized.
8. Risks: These may come about as a result of pests, disease, crop failure, e.t.c. It is
weather that brings most of these risks. However some enterprises are more risky than
others. These have to be considered when planning.
9. Flexibility: Plans do not need to be all that rigid as the manager may decide to
change from one enterprise to another.
10. Specialization or diversification: When making a plan, it is important that one
knows a plan, whether he should go into specialization e.g. operation in livestock
only, or to move into diversification where a wide range of enterprises are involved.
Steps involved in farm planning process

1. Collection and analysis of information relating to the environmental condition in
order to establish all the production possibilities. The information needed is like
amount of rainfall, soil type, transport facilities and marketing availability for both
inputs and outputs e.t.c.
2. Consider the objectives of the manager in terms of what is to be produced or the
levels of production and amounts to be produced
3. Set out a list all resources available in order to establish operator’s abilities and
limitations e.g. farm size: availability of all forms of resources e.g. Land, Labor,
Capital and Management.
4. Make a list of all the possible enterprise alternatives from which a choice can
be made. Select the best using gross margin analysis e.g. crop enterprises:
Vegetables, Maize, Wheat, Potatoes, or Livestock enterprises: dairy, Beef,
5. Calculate the gross margin /unit to give a list of properties.

6. Establish the technical feasibility of the best alternatives to ensure that resources
required can be met from available resources.

7. Translate plan into financial plan into financial terms i.e. into expenditure and
income.
Budgeting as a method of planning:

Budgeting is translation of physical plan into financial terms. It involves multiplying
the prices and quantities of inputs and outputs. As such, the estimated quantities of
output and input and their prices must be justified and realistic. With estimates of
input available, gross margins of individual enterprises can be calculated and
compared in order to get a list of priorities. The enterprises with highest gross margin
per unit of the most limiting input are considered priority to others.
Kinds of Budget
There are two major kinds budget: 1) Partial budgets 2) Complete budget
However, there are other kinds of budgets:
1) Break-ever budget
2) Enterprise budget
3) Capital budget
1. Partial Budget
This is the simplest form of a budget and represents the financial effect of fairly minor
change in farm organization. The circumstances calling for a partial budget are
a) Adopting a new technique in the farm e.g changing from ox-plough to tractors
plough
b) Replacing an enterprise with another .e.g replacing commercial maize with wheat.
c) Expanding an enterprise.
The adoption of a new technique, a new enterprise or the expansion of an enterprise
will depend on whether the resulting gross margin is reasonable and satisfies the
objectives of the manager.

Format of a partial budget

Partial budget
Proposed change:
LOSSES GAINS
(i) Additional costs (i) Costs saved
(ii) Revenue Forgone (ii) Extra Revenue
Totals Totals
Net change in income:
Partial budget examples

1) New Technique
A farmer has ten acres of land, 4acres of which is planted to a permanent crop
(coffee). Of the remaining 6 acres, at least one half must be resting at any one time.
This year, he intends opening 3 acres for sunflower. With previous sunflower crops he
has tried casual labour at the rate of 40 man-days per acre at shillings 20 per man-day.
He is considering replacing casual labour with a hired tractor doing the work at
shillings 1100/-per acre. The farmer anticipates that by working the tractor will be an
increase in average sunflower yield from 7000 kgs to 8000 kgs per acre due to better
cultivation and timely planting. The sunflower would fetch Kshs. 0.5 per kg
harvesting costs are 100/- per 1000kg of sunflower seeds. Required: Prepare a
partial budget and advise the farmer whether the change is worth while or not.

Partial budget
Proposed change: Replacement of ox-plough with tractor plough
(i) Additional costs (i) Costs saved
Tractor cultivation 3 acres @ Shs 1100per Labour costs (40 MD/acre for 3 acres
acre 3, 300 @ Sh.20 /MD) 2400
Harvesting 3000 kg sunflower per acre @
Shs 100 per 1000 Kg.
300
Total costs 3,600 Total costs 2400

(ii) Revenue Forgone (ii) Extra Revenue
NIL 1000 Kg/acre @ Sh.0.5/ Kg.
1500
Totals 3,600 Totals 3900
Net change in income: KSHS. 300
Advice: Under present circumstances, the change represent a net gain of Shs 300/-
and is therefore worth while.
(2) Replacement of an Enterprise

A farmer has 30 acres of arable land, 20 acres of which is under maize and 10 acres
under grass ley. He wishes to know whether replacing 10 acres of maize with Irish
potatoes would be worthwhile. The fertilizer rate would have to be increased from
one bag to per acre for maize to 2 bags per acre for potatoes and an extra 20 man days
of casual labor at the rate of Shs. 40/ MD will be necessary as a result of the change.
Average yields of maize and potatoes are 15 and 50 bags per acre respectively. The
output prices are Shs. 220 per bag of maize and Sh. 180 per bag of per bag of
potatoes. Seeds cost 120 per acre for maize 320 per acre for potatoes .Fertilizers costs
850 per bag. Required: Draw up a partial budget and indicate the effects of the
change and advise the farmer.

Partial Budget
Proposed change; Replacement of maize with potatoes
1) Extra costs (i) Cost saved
a)Potatoes seed 320 per acre 3200 Maize seed 120 per acre 1200
b)Fertilizer 10 bags @ 850 per bag 8500
c)Casual labor 850 per Acre (20*10*40) 8000
Total costs 19700 1200
(ii) Revenue Forgone (ii) Extra revenue
150 bags of maize @Shs. 220 33000 500 bags potatoes @180/- 90,000
Total 52,700 Total 91,200

Net change in income: +38,500
Conclusion: The change represents a net gain in income of Shs 38500 and is
therefore worthwhile
3) Expansion of enterprise
A farmer has 10 acres of land on which he grows 2 acres of maize and beans
(maize in first rains and beans in the 2nd rains), 2 areas of potatoes and keeps 2
milking cows. He has now established that 4 acres are adequate for his two cows and
he wishes to use the 2 acres remaining for growing potatoes. Potatoes will require 70
man-days of labour per acre which is available on casual bases at a wage rate of Shs.
25 per MD. In addition 2 bags of fertilizer per acre at the cost of 850 per bag will be
necessary. Seed costs for potatoes will be 600 per acre. No change in fixed costs is
expected. Potatoes are expected to yield 60 bags per acre selling at Shs. 200 per bag.
Double cropping is the normal practice for potatoes in this area.
Required: Prepare a partial budget and advise the farmer on proposed change.

Partial budget
Proposed change: To expand potato enterprise
(i) Extra cost (ii) Cost saved
Hired labour (70x2x2 )@ 25 7000
Fertilizer (2x2x2) bags @ 850 6800
Seed (2x2) @ 600 2400
Total costs 16,200 Total costs 0
(ii) Revenue forgone (ii) Extra Revenue
60x2x2 bags @ 200 48000
Totals 16,200 Totals 48000

Net change in income: 31,800
Conclusion: There is an increase in net income of shs 31800 therefore the change is
worthwhile
Complete (whole farm) Budget

A complete budget is a summary of expected income, expenses and profit for a given
farm plan. It can be developed with sufficient details to include estimate of total input
requirements for crop production, livestock feed requirement, capital needed, and
other information needed to implement the whole farm plan properly. Much of the
information needed to complete the budget are gathered during the development of
the whole farm plan. A complete farm budget will show the following:
i) Total farm income. This is extracted from individual enterprise budget and then
summarized in the complete budget.
ii) Variable costs are existed by type or category such as seed, feeds, fertilizer, repair
etc. Most of these are extracted from gross margin calculation of the individual
enterprises.
NOTE: There are variable expenses such as building repairs, auto expenses, utilities
and other farm overhead expenses are difficult to allocate to specific expenses. These
must be included in the whole farm budget.
iii) Fixed expenses: These are omitted from the enterprise gross margin calculation.
They are fixed in the short run and do not change for different enterprise
combinations. So their omissions do not affect the selection of a profit maximizing
plan. However, fixed costs do not affect farm profit and must be included in the
complete budget.
4) Net farm income: Obtained when both fixed and variables costs are netted out of
the gross farm income.

Example :
A complete Farm Budget for Upton farm.
INCOME: KSH
Maize 54,000
Barley 43,000
Wheat 13,500
Steers 40,000
Total income 150,500
VARIABLE EXPENSES
Fertilizer 11,900
Seed 3,600
Chemicals 7,900
Fuel oil 4,050
Machinery 2,650
Feed purchased 1,600
Livestock purchased 29,000
Other livestock expenses 1,100
Machine hire 10,250
Miscellaneous 2,450
Total Variable exp. 74,500
Gross Margin 76,000

FIXED EXPENSES
Property tax 2,600
Insurance 1,250
Interest on debt 22,000
Machinery depreciation 7,200
Bldg depreciation 3,200
Total fixed expenses 36,250
Total expenses (Fixed +Variable)(74,500+36,250) 110,750
Net Farm Income (profit) 39,750

Break even budgeting
Break even budgeting is usually useful when a certain item in a partial budget is
uncertain. The method is applied by representing the uncertain figure with a symbol
say Y and then completing the rest of the partial budget in the usual way. The rise or
fall in profits is assumed to be nil i.e. we assume that the change just breaks even, so
that the two sides of the budget equate. The break even value of the uncertain figure
can be calculated.
A manager can then judge his chance of achieving this figure of say, yield or price in
considering the introduction of a new enterprise. The manager may be well
experienced to be sure that the level likely to be achieved is well above the break even
amount and thus be able to decide whether or not the proposed change is worthwhile.
Break even analysis can provide answers to such questions as
• What are the likely effects of a change in price?
• What are the likely effects of a change in product mix?
• What are the likely effects on profits if fixed and variable costs change?
• At what scale of activity does the farmer begin to lose?
• By how much can the scale fall before the farmer starts to lose?
Examples of break even budgeting

1. A farmer who produces mutton and wool is contemplating to change to wheat
production. The average cost of wheat production is Kshs. 22,800 per ha. The
price of wheat is Kshs. 1200 per 90 kg bag. At what yield will the farmer
begin making a profit?
Solution:
At break even point: TR = TC
1200*Y = 22,800
Y = 22,800 / 1200
Y = 19.
Therefore at break even, the farmer must produce at lest 19 Kg bags per ha and to
make a profit the farmer must produce > 19 bags.
2. A dairy farmer is contemplating whether to engage in veal production i.e.

fatten his bull calves and sell at Kshs. 33,280 (160 Kg. live weight @ Kshs.
208) or sell the new born calve at Kshs. 1600 and the milk for Kshs. 15/Kg.
To attain the required weight the calve will have consumed 1800 Kg. of milk.
Other costs include labour and housing costs which are estimated at Kshs.
3,200.
Required: Use this information to advise the farmer on the merits or
demerits of veal production.
Solution:
Let the price of milk sold to the veal industry be x
Therefore
1800 * x + 1600 + 3200 = 33,200
1800x = 33,200 – 1600 – 3200
x = 28,400/ 1800
x = 15.80
Advice: the farmer should engage in both dairy and veal enterprises but treat them
independently.

Program planning
This is a form of mathematical technique for maximizing net farm income by
selecting the type and size of enterprises that make the best use of scarce resources
within the limits of any other constraints that apply. These constraints can affect the
objectives. Program planning has an advantage over budgeting in that a near optimal
plan is reached.
Information needed for program planning

a) Objective to be reached
From the view point of a farmer, his objective is to maximize whole farm profit
within the limits imposed by the constraints. These constraints may include non
budgetable items like his own wishes and skills or desire for leisure or status e.g. to
produce cattle to display during agricultural shows even if unprofitable.
b) Resource availability and constraints

Constraints limit the further development of modification of enterprises. Identifying
the constraints can be harder than subsequent arithmetic calculations. Constraints may
include: Land, capital, Location limitations, Sequence of activities, Labour, Legal
aspects, Self sufficiency, Administration and political constraints and Managerial
constrains.
c) Feasible activities
All enterprises that are feasible in a given economic and ecological environment need
to be considered. The feasibility of cropping activity depends greatly on the length
and quality of the growing season (s) unless irrigation is available.
d) Gross margins of feasible activities

The gross margin of an activity or enterprise is usually expressed per ha in the case of
crops or per head or animal unit in the case of livestock. However, gross margins can
be expressed in terms of labour use or working capital when these are seasonally
limiting.
d) Resources needed for feasible activities

These are the resource needs for each unit of activity or enterprise e.g. per hectare or
per head. The data are best obtained from records kept on the farm being planned.
However in the absence of these, data from other holdings using similar technology
may be obtained.
Program planning procedure

The activity giving the highest total gross margin when expanded to the limit is taken
first, and expanded to the limit followed by the next activity and so on…….
Example:
On a medium size farm in a high potential area of Molo district, the relevant activities
and constraints are found to be as follows:

Pyrethrum(P) Dairy (D) Potatoes (Po) Maize (M) Wool

sheep (Ws)
GM per acre 550 385 370 220 180
Resource coefficients
Constraints Resources
1st rains land 160 acres 1 1 1 0 1
2nd rains land 160 acres 1 1 0 1 1
Pyrethrum quota 40 acres - - - - -
March labour 2400 MDs 0 30 20 0 20
April labour 2400 MDs 30 20 10 0 15
August labour 2400 MDs 20 20 10 10 10
Nov. labour 2400 MDs 0 30 0 5 10
Dec. labour 2400 MDs 35 10 0 5 10
Required: Develop a program plan for the farm, giving the feasible enterprise
combination that maximizes farm profits.
Solution
(a) Step 1: Possible acreage by enterprise
Constraint Pyrethrum Dairy Potatoes Maize Wool sheep
1st rains land 160 ÷ 1 = 160 160 ÷ 1 = 160 160 ÷ 1 = 160 160 ÷ 0 = ∞ 160 ÷ 1 = 160
2nd rains land 160 ÷ 1 = 160 160 ÷ 1 = 160 160 ÷ 0 = ∞ 160 ÷ 1 = 160 160 ÷ 1 = 160
Pyrethrum quota 40 - - - -
March labour 2400 ÷ 0 = ∞ 2400÷30 = 80 2400÷20= 120 2400÷0 = ∞ 2400÷20= 120
April labour 2400÷30 = 80 2400÷20= 120 2400÷10= 240 2400÷0= ∞ 2400÷15= 160
August labour 2400÷20= 120 2400÷20= 120 2400÷10= 240 2400÷10= 240 2400÷10= 240
Nov. labour 2400 ÷ 0 = ∞ 2400÷30 = 80 2400 ÷ 0 = ∞ 2400 ÷ 5 =480 2400÷10= 240
Dec. labour 2400÷35= 68.6 2400÷10= 240 2400 ÷ 0 = ∞ 2400 ÷ 5 =480 2400÷10= 240
Possible acreage 40 80 120 160 120
(b) Total Gross margins

Enterprise GM Possible acreage Total GM
Pyrethrum 550 40 22,000
Dairy 385 80 30,800
Potatoes 370 120 44,400
Maize 220 160 35,200
Wool sheep 180 120 21,600
Decision 1: The farmer should expand the potato enterprise to the limit.
(c) Remaining resources

1st rains land 160 – (1*120) = 40 acres
2nd rains land 160 – (0*120) = 160 acres
Pyrethrum quota 40 – 0 = 40 acres
March labour 2400 – (20 * 120) = 0 MDs
April labour 2400 – (10 * 120) = 1200 MDs
August labour 2400 – (10 * 120) = 1200 MDs
Nov. labour 2400 – (0 * 120) = 2400 MDs
Dec. labour 2400 – (0 * 120) = 2400 MDs

(d) Step 2: Possible acreage by enterprise

Constraint Pyrethrum Dairy Maize Wool sheep
1st rains land 40÷1 = 40 40÷1 = 40 40 ÷ 0 = ∞ 40÷1 = 40
2nd rains land 40÷1 = 40 40÷1 = 40 160 ÷ 1 = 160 40÷1 = 40
Pyrethrum quota 40÷1 = 40 - - -
March labour 0÷0=- 0 ÷ 30 = 0 0÷0=- 0 ÷ 20 = 0
April labour 1200 ÷ 30= 40 1200 ÷ 20 =160 120 ÷ 0 = ∞ 1200 ÷ 15 =80
August labour 0 ÷ 20 = 0 0 ÷ 20 = 0 1200 ÷ 10 =120 0 ÷ 15 = 0
Nov. labour 1800 ÷ 0 = ∞ 1800 ÷ 30 = 60 2400 ÷ 5 = 480 1800 ÷ 10 = 180
Dec. labour 1800 ÷ 35 = 51.4 1800 ÷ 10 = 180 2400 ÷ 5 = 480 1800 ÷ 10 = 180
Possible acreage 0 0 120 0
(e) Total Gross margins
Enterprise GM Possible acreage Total GM

Pyrethrum 550 0 0
Dairy 385 0 0
Maize 220 120 26,400
Woolsheep 180 0 0
(f) Remaining resources
1st rains land 40 – (0*120) = 40 acres

2nd rains land 160 – (1*120) = 40 acres
March labour 0 – (0 * 120) = 0 MDs
April labour 1200 – (0 * 120) = 1200 MDs
August labour 1200 – (10 * 120) = 0 MDs
Nov. labour 2400 – (05* 120) = 1800 MDs
Dec. labour 2400 – (5 * 120) = 1800 MDs
(g) Near optimal plan

Enterprise Acreage GM per acre Total Gross margin
Potatoes 120 370 44,400
Maize 120 220 26,400
WHOLE FARM GROSS MARGIN(Kshs.) 70,800
Linear Programming
Linear programming is a systematic mathematical procedure for finding the optimal
plan for a given set of conditions. It involves the maximization or minimization of a
linear function subject to linear constraints.
Assumptions of linear programming

1. Linearity: The objective function and the constraints in a linear programming
problem are linear. Linearity implies that multiplying all inputs used in a

production process by a constant, results in a constant change in the output of

that process.
2. Additivity: This assumption requires that the total amount of resources used
in all production processes must equal to the sum of the amount of resources
used in each process. Suppose that in order to produce a unit of y1, 2 units of
x1 and 3 units of x2 are required. Consequently, four units of the output must
require 4 units of x1 and 6 units of x2 and 500 units of y1 will require 1000
units of x1 and 1500 units of x2. Hence constant returns to scale exist and
interaction between processes is not allowed.
3. Non negativity: The solution should not require that negative quantities of an
input or resource be used. The usual solution algorithms for linear
programming models do not allow for negative quantities for inputs to be used
nor negative outputs to be produced. However zero quantities for both inputs
and outputs are allowed.
4. Divisibility: The assumption specifies that resources and products can be
produced in fractional amounts. The mathematical procedure requires
complete divisibility of inputs and outputs. However in some case where
resources come only in a critical mass e.g. 25 Kg or 50 Kg. pack or one
tractor it may necessary to be more ingenious in model specification and
interpretation.
5. Finiteness: This specifies a limit to the number of alternative processes and

resource restrictions that can be included in the analysis. Such a practical
assumption is not unrealistic in evaluating real world processes even if the
number of alternatives seems infinite. From managers can only allocate so
much time to the evaluation of alternative and must restrict the analysis to a
subset of possible production and marketing alternatives available to them.
6. Single-Valued expectations: Linear programming models assume that

coefficients such as input requirements and prices are known apriori with
certainty. For example if wheat, maize and soybeans are to be included as
possible enterprises within a linear programming model, the prices for which
these commodities sell must be known in order to construct the model.
Linear programming problem

It arises whenever two or more activities are competing for limited resources. The
basic data necessary for LP include:
• The alternative activities to be considered.
• The returns / gross margins for each activity.
• The constraining resources.
• The demands of each activity on each constraint i.e. the input–output
coefficients.
When all the required information is available, LP then proceeds by an iterative

procedure which means a step by step trial and error procedure to the optimum
solution.
The procedure is however systematic because:

a) There is a mechanical rule which determines after each step exactly what the
next step is to be, on the basis of the results of the trial just completed.

b) The mechanical rule ensures that each step or iteration will yield a higher
profit/ gross margin than the previous one. This ensures that the calculations
are working steadily close to the desired optimum plan.
CASE:
Assume that:
1. We want to determine the production program involving two products X1 and
X2 .
2. Each product requires three different factors of production: Land, Labour and
Capital.
Note that products X1 and X2 are our activities, the three factors are our resources
and the restrictions on the available resources are our constraints. We can then
design a program that will maximize our profit.
Example:
A farmer in Kitale is capable of producing maize (X1) and Beans (X2) in his 5 Ha
parcel of land. The gross margins for maize and beans are Kshs. 800 and Kshs.
500 per Ha respectively. Labour in the farm is most limiting in June and we have
only 32 Man days available. During this month, the maize enterprise requires 8
man days per Ha while beans requires 4 man days per Ha. Each Ha of maize
requires Kshs. 120 for all purchased inputs while beans require Kshs. 40 for the
same. The farmer has Kshs. 480 available and he cannot raise any more.
Required: Set up a linear programming problem for the farmer.
Solution:
Linear objective function
To maximize profit: Max Π = 800 X1 + 500X2
Structural objective function:

Land: X1 + X2 ≤ 5
Labour: 8X1 + 4X2 ≤ 32
Capital: 120X1 + 40X2 ≤ 480
Non negativity condition: X1, X2 ≥ 0
Solving a Linear programming problem

An LP problem may be solved through four methods
• Graphical
• Trial and Error
• Vector method
• Simplex method
Graphical method
Plot the equations on a plane. The shaded region indicates the feasible
combinations of the two products according to the constrains we have. The
optimal point has to be along the frontier OABC. The possible points are
(X2, X1) A (0, 4), B (2, 3) and C (5, 0).
Compute the profits at the three points:

A: (800 * 4) + (500 * 0) = Ksh. 3,200

B: (800 * 3) + (500 * 2) = Ksh. 3,400
C: (800 * 0) + (500 * 5) = Ksh. 2500
The optimal point is B since it helps us attain the maximum profits without
exceeding any of the constraints.
X1
A
4
3 B
C
0 1 2 3 5 6 8 9 11 12
4 7 10
Figure 5.1 Graphical solution of a linear programming problem. X2

TOPIC 6: BASIC FARM ACCOUNTING

INTRODUCTION
Today’s farming is profession oriented being operated as a business rather than as a
way of life. Therefore it needs all the records of market transactions, purchases and
sales as well as all other records that go along with the business
Although, most of the farmers in developing countries are illiterate, the burden
of record keeping and analysis falls upon the farm operator and his dear wife who
must understand how to keep and use the records. Most farmers dislike paper work
and are carefully occupied with farm work besides; it is real problem for a farmer
where to keep records as we cannot expect an office/ a desk to be available on an
average farm.
Therefore farm accounting should be kept very simple all records bound
together in one book.
This book has to be set up in away that all information can be filled indirectly as
man’s memory is short –farmers have to be taught how to fill the book daily weekly
or at least monthly.
If the farmers keeps all receipts, invoices, statements and other documents in
a file, box /clip on the wall , he will have sufficient for adequate management of his
farm.
Objectives of farm accounts

i) They provide an indispensable tool for farm management
Accounts show the farmer which enterprise are making or losing money. He also
knows which ones are returning the most his labor and capital and he can see whether
he should move more into specialization or whether new activities will increase
revenues. Thus farm accounts will discern the weak spots and show where and how
to improve management so as to arrive at a greater income.
ii) They provide a basis for judging how the years farm operation is functioning
as compared to the original plan and help the farmers make needed modification for
control and decisions in the year ahead.
iii) There is a possibility of calculating the revenues of individual enterprises and
to determine the cost of providing them.

iv) The farmer with a well kept set of accounts can negotiate with the bank for a
loan for the expansion of his business, and he is likely to receive a more sympathetic
treatment than the farm who has only a vague idea of his financial position
v) Records serve as basis for income tax. The farmer who does not keep records
often will find that he overestimates his income, and therefore his income tax.
vi) New directions can be determined effectively only if the farmer has the input
output, yield, labour requirement, feed outcome, and similar data to fit into alternative
plans.
vii) Farm accounts helps to control loss of theft of cash or stocks.
Types of business documents

Cash receipt Book
When merchandise is bought and paid in cash, this is called a cash sale. In this case
the seller will write out a cash receipt. The cash receipt book is printed in duplicate.
The original cash receipt is given to the buyers. The duplicate cash receipt remains in
the book.
When the farmer is selling, he later uses the duplicate cash receipt to enter into the
cash analysis book. But when purchasing, he uses the original cash receipt for entries.
The peasant farm, however, selling at home or in the market will not use a cash
receipt book. For his accounting, he has to note /record sales at the end the day in his
petty cash book or directly in the cash analysis book.
Invoice book
Whenever merchandise such as farm produce sold on credit, an invoice is made out
on an invoice book, which is in triplicate. The original invoice is given together with
the merchandise. The duplicate is sent together with the statement to the buyer and
triplicate remains in the book as a record.
Small scale farmers usually don’t sell on credit but should keep the invoices they
receive in order to counter check the statements.
Statement
At the end of each month, all invoices of every customer are summarized in separate
statement sent to the customer for payment. The date of the statement is the last day
of the month concerned. The statement gives the date of the invoice, its number, with

or without details, and the amount under the heading debit. If during the month any
payment is received from the customer, it will be accounted for under the heading
credit. The differences between debit & credit is entered under the heading balance.
The final balance is the amount due for payment.
Purchase order
This is a written request to a trading business to supplying specified merchandise on
credit awaiting payment when its received.
The farmer would not make use of this but in large businesses & organizations it is an
indispensable means of controlling expenditure. It is commonly called Local
purchase order (L.P.O). The L.P.O specifies the merchandise number, kind, size, and
make & even colour. It needs the signature of person who ordered and actually
brought the purchase.
Cheque book
A cheque is an order to a bank to make payment of money. Cheques are contained in
cheque book, and are used on the following types of bank accounts:
Current Account: that earns no interest & money can be withdrawn without notice
by the use of a cheque. Current account holder is provided with a cheque book.
Deposit account: Earns interest, there’s a minimum that remains in the account.
Several days notice must be given for any large withdrawals from the account.
For business, the current account is commonly used. The person who writes a
cheque is called drawer and recipient is the payee.
A cheque can either be open or crossed. A crossed cheque cannot be cashed out but
must be paid into a bank account. An open cheque can be cashed by anybody who
comes a cross it.
Money order
Is another means of making payments. It’s a means of transmitting money to people
who don’t have bank accounts. For a money order, payments are done by the post
office. A money order has to the completed, giving particulars of senders and payee
including name of post office where it will be cashed (but these forms/means of
transmitting money are outdated because of technology. There are newer means e.g.
posta pay, Mpesa, Soko tele, etc.)

Master roll
Is a register of the entire worker showing name, wage rate, overtime, and total day
wage. It’s important when calculation wages at end month.
Pay roll
Shows a list of people to be paid and amount due to each person.
Books used to keep farm records

4. Informal books:
(i) Diary: Records daily activities taking place in the farm.
(ii) Leaflets: Are loose paper scribed to show activities etc.
2. Formal books
Books already prepared for recording farm activities and are available in bookshops
There include:
Ledger book: It is a principle document in book keeping. It contains details of what
the farmers owns, all the debts and credits of the farm and value of assets and
liabilities
Cash book: It records daily cash received & paid in the farm. The information in the
cash book is got from journals / directly from original entry in receipt books.
Journals: These are books of original entry where day to day activities of farm
business are entered in details. The information is later posted to the ledger or
cashbook.

TOPIC 7: MEASURES OF FARM PERFOMANCE

FINANCIAL STATEMENTS
THE INCOME STATEMENT
The income statement is also called a profit and loss statement. Its is a summary of
receipts and gains during a specified period, usually one year, less expenses and
losses during the same period. The result is a net income or net loss.
1. Receipts
Receipts are derived from sales of crops, livestock and livestock products during the
year. The objectives of the receipts section of the income statement is to show as
accurately as possible the gross production of the farm in shillings during the year.
Recognition of inventory changes is very important in analyzing the financial position
of the farm.
The sum total receipts + changes in inventory for farms with large purchase of feeder
livestock and feed overstate the income actually produced on the farm. This
overstatement is corrected by deducting purchase livestock and feed to obtain gross
income.
For purposes of financial analysis, reports from the sale of capital assets such land or
machinery are generally not considered as income since such income is not really
produced or earned during the period.
2. Expenses
All expenses or costs involved in the operation of the business during the period
covered by the income statement should be included .Capital expenditure to purchase
fixed assets such as land, machinery, dairy cows and breeding stock are excluded
since such items usually are used in the business for several years. The depreciation
on these items that occurs during the year should be included.
3. Net income
There are 3 net income figures useful in the analysis of the farm.
a. Net cash income: equals cash receipts less cash expenses during the period,
excluding purchase and sales capital assets. The purpose of the net cash income
figure is for analysis of cash flow.
b.Net operating income: calculated by subtracting operating expenses from gross
income. This figures facilities companion of farms with different fixed cost
structures

c. Net farm income: computed by deducting fixed costs from net operating income.
NFI represents the minor accruing to operator and family labour, mgt and equity
capital, Of the three measures of capital , this is the most useful.
Example
Tembo Farm – Income statement for the year ended 31st December, 2007.
Receipts
Cattle sales 49662
Pig sales 16040
Crop sales 8126
Miscellaneous income 95
Increase (decrease) in inventory (10,150)
Less : Livestock purchased 19484
Feed purchased 13468
Gross income 30,771
Operating expenses
Machinery power 4491
Hired labour 876
Livestock exp. 438
Seed , fertilizer, etc 4208
Interest on current bars 1578
Miscellaneous 247
Total operating expenses 11,838
NET OPERATING INCOME 18,933
Fixed Expenses
Property tax 2829
Interest on term basis 2290
Repairs insurance 1023
Depreciation on term .assets 2641
Depreciation F/assets 981
Total fixed expenses 9764
NET FARM INCOME 9,169
Financial Ratios /Tests

Analysis of financial relationship in the income statement provides information
concerning performance of the farm business in addition to that obtained directed by
income statement analysis. Lenders generally use financial nations in loan analysis.
Income statement ratios can be divided into 2 categories:
• Those that relate expenses to Gross income.

• Those that relate income to capital investment.

Expense: Income Ratios
This ratio explains that total operating expenses amount to 38 cents per shillings of
gross income.
b)
This ratio explains that fixed expenses amount to 32 cents /shillings of gross income.
The operating and fixed ratios comprise the gross ratio

c)
All the 3 nations indicate that the farmer is an efficient farm operator. It appears that
the farmer watches his expenses very carefully. If expenditures were greater than
income, this would imply that the farmer is not making any profits, and therefore
should close down or change the enterprises that he/ she is currently operating on.
2) Income: Investment Ratios. These are used to indicate the efficiency with which
capital is being employed in business.
a)
b)
MANAGEMENT FACTORS
Apart from looking at the financial ratios or doing financial analysis to determine the
performance of the farm business, there are other factors to be considered and these
are the management factors
1. Management return
Derived from NFI by deducting a wage for the operation and family labour and a
return on the equity capital used in the business.

NFI 9209
Less
Operation and family labour 4000
Interest on equity capital 5000 9000
Mgt return 209
Comparison of this farmers management return with management for others farmers
operating similar farms in the area provides a basis for comparison in rating this
farmer’s relative performance as a manager.
2. Crop yields and value

Crop yield provide another indication of farmer’s management ability. If yields
compare relative to the area average, them management is good.
e.g. if management yield is 15 bags per acre and the area average is 12 bags per acre,
then management is good and poor if otherwise.
3. Livestock income.
Livestock income per 100/- of feeds is a measure of management efficiency in
livestock products
4. Gross income / man year.
Is a measure of efficiency in the use of labour .with the cost of labour continually
increasing, this measure is very important.
THE BALANCE SHEET

The balance sheet is also known as a net worth statement. It is a summary of the
assets and liabilities of the farm together with a statement of the owner’s equity or net
worth. Its primary purpose is to measure the financial solvency of the business, that is,
to show the margin by which debt obligations would be covered if the business were
terminated and all assets were sold.
The balance sheet has two characteristics.
• It always refers to a specific date or point in time.
• Always divided into 3 parts: assets, Liabitility and Owner’s equity. It is the
owner’s equity that makes the statement balance.

The balance sheet shows only assets owned and debt s owed.
Tembo farm
Balance sheet as at 31.12.2007
Assets ‘000 Liabilities ‘000
Current assets Current liabilities
Cash 262 Accounts payable 262
Maize in store 3443 Note for cattle 4100
Soya beans 1122 Note for feed 3291
Hay 1006 Total 7653
Sheep 1394 Long term liabilities
Cattle 4178 AFC loan 5220
Poultry 140 Total liabilities 12873
Total 11545 Owners equity 7225
Fixed assets
Lorry 1150
Machinery and equipment 7403
Total 8553
Total Assets 20098 Total assets and owners equity 20098
Ratio analysis: The main objectives of ratio analysis are:

• To drive financial control function.
• Measure performance of the business.
• Monitor financial progress of the farm business.
• Allows trend and comparative analysis.
• Ratios can be compared across types and sizes of businesses more so than
dollars
Liquidity:
a)
This indicates whether the current assets are adequate to meet the current
indebtedness. The ratio of 1.56 indicates that there is Ksh. 1.51 of current assets to
back up each shilling of current liabilities. A ratio of 1:1 is acceptable.

Solvency:
a)
This indicates the extend to which the farm is reliant on debt financing. The higher
this ratio, the more risky a creditor will perceive its exposure in your farm business,
making it hard to obtain credit.
b)
c)
NB: A sum of the two should equal to 1.
d)
This measures the overall solvency position of the farm

Exercises
Q1. The following information was obtainable from the books of Mudare farm on
31.12.08
Capital on 1.1.08 500000
Net profit for 08 121300
Drawing during 08 72000
AFC loan payable 2006 150000
ICDC loan payable 2005 100000
Farm creditors 78400
Bank overdraft 22300
Premises 300000
Debtors 139000
Machinery 280000
Stock 115400
Motor vehicles 48000
Cash in hand 11000
Furniture and fittings 16500
Required: Prepare the balance sheet for Mudare farm as at 31/12/2008.

Solution:
MUDARE FARM
BALANCE SHEET AS AT 31.12.08
Current assets Current liabilities
Stock 115,400 Farm creditors 78,400
Trade debtors 139,000 Bank over draft 22,300
Cash in hand 1,100 Total 100,700
Total 255, 500 Long term liabilities
Fixed assets AFC loan 150,000
Premises 300,000 ICDC loan 100,000
Machinery 280,000 Total 250,000
Furniture and fittings 16,500 Total liabilities 350,700
M/Vehicles 48,000 Capital 500,000
Total 644,500 + Net profit 121,300
Less drawings 72000
Owners Equity 549,300
Total assets 900,000 Total liab. and owners equity 900,000
Q2. The following information relates to Twiga farm

Stocks (1.1.06) 8559
Farm Debtors (1.1.06) 3788
Farm Creditors (1,1,06) 6895
Receipts 51134
Payments 41761
Discount RCD 1117
Cash sales 16117
Stock (31.12.6) 9307
Farm debtors (31.12.06) 4084
Farm creditors ( 31.12.06) 7492
Required: Prepare on income statement for year ended 31.12.2007

Solution:
TWIGA FARM
INCOME STATEMENT FOR THE YEAR ENDED 31.12.06
Income Kshs. Kshs. Kshs.
Receipts 51134
Disc RCD 1117
Cash Sales 16117
Stock valuation increase 748
Closing stocks 4084
Less opening stocks 3788 296 69412
Expenses
Payments 41761
Closing creditors 7492
Less opening creditors 6892 597 42, 358
Net profit before tax 27,054

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AGEC 0243: Farm Management and Accounts

PREPARED BY MR. DANIEL KYALO WILLY

DEPARTMENT OF AGRICULTURAL ECONOMICS AND BUSINESS

© 2008 Daniel Kyalo Willy i

TOPIC 1: INTRODUCTION TO FARM MANAGEMENT PRINCIPLES

© 2008 Daniel Kyalo Willy 1

Role or scope of farm management

© 2008 Daniel Kyalo Willy 2

DECISION MAKING PROCESS

© 2008 Daniel Kyalo Willy 3

b) Magnitude of the potential gain/loss

© 2008 Daniel Kyalo Willy 4

© 2008 Daniel Kyalo Willy 5

1. A good plan should be based on clear understanding of the attainable goals

© 2008 Daniel Kyalo Willy 6

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- Seek participation of all firm coordinates or those who manage the

TOPIC 2: ECONOMIC PRINCIPLES AND CONCEPTS RELATING TO

© 2008 Daniel Kyalo Willy 8

Units of fertilizers(Kg) TPP MPP APP

The Marginal Principle

The Law of Diminishing Returns

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© 2008 Daniel Kyalo Willy 10

The Marginal Rate of Substitution

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b) Decreasing (Diminishing) Rate of substitution

© 2008 Daniel Kyalo Willy 12

Application of the Concepts

The maximum vertical distance

© 2008 Daniel Kyalo Willy 13 A' C' B Inputs

b) How much to produce

TOPIC 3: FARM LAYOUT AND ROTATION PROGRAMME.

© 2008 Daniel Kyalo Willy 15

The farm/ranch layout

© 2008 Daniel Kyalo Willy 16

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d) Roads should be so located as to ensure ease of accessibility of every part of the

TOPIC 4: COLLECTION AND ANALYSIS OF FARM MANAGEMENT DATA

© 2008 Daniel Kyalo Willy 18

The Data needed

© 2008 Daniel Kyalo Willy 19

• Crop area – hectares, acres

© 2008 Daniel Kyalo Willy 20

to be excluded in the main survey of farmers divided into groups/strata using

The main disadvantages of surveys are:

© 2008 Daniel Kyalo Willy 21

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TOPIC 5: FARM PLANNING AND BUDGETING

4.2 Factors to consider when planning

© 2008 Daniel Kyalo Willy 23

5. Capital availability: May be owned or borrowed. This has to be ensured before

Steps involved in farm planning process

5. Calculate the gross margin /unit to give a list of properties.

© 2008 Daniel Kyalo Willy 24

Budgeting as a method of planning:

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Format of a partial budget

(ii) Revenue Forgone (ii) Extra Revenue

Partial budget examples

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Total costs 3,600 Total costs 2400

(2) Replacement of an Enterprise

© 2008 Daniel Kyalo Willy 27