ABT411 Dr.

Anderson

FARM PLANNING AND BUDGETING

Definitions Farm planning can be defined in several ways. It can be acceptably

defined as a process whereby a systematic arrangement of the future activities of the
farm are made with a view to attaining some desired objective(s) in the most efficient
manner. This definition emphasises the fact that farm planning is a dynamic or
continuous activity that incorporates environmental changes in the allocation of the
farm’s resources to various enterprises or activities. It can also be inferred from its
definition that a farm plan is a proposal on the use or allocation of the farm’s
resources.

Farm Planning thus involves some element of forecasting or prediction. There can be
several alternative farm plans at any given time. The number of alternative farm plans
corresponds to that of the possible resource combinations (or uses) that are available
to the farmer. The farm plan that leads most to the attainment of the desired objective
is the optimal one.

The Cambridge Dictionary defines a budget as “a plan to show how much money a
person or organization will earn and how much they will need or be able to spend.”
Budgeting is, therefore, the financial evaluation of the outcome of a farm plan. It is a
detailed quantitative statement, in monetary terms, of a farm plan or a change in a
farm plan or its financial result. The aim of budgeting is to estimate whether a
proposed change is justified by the chance of earning profit. In its widest sense, a
budget is a forecast of income and expenditure. Budgeting is thus an aid to planning
rather than a planning method itself as it is used to estimate, in financial terms, the
likely result of an already made plan. On the basis on the budgets, one can select or
identify the optimal farm plan.

The Need for Farm Planning and Budgeting

The resources at the disposal of an individual or society, at any given time, are of a
fixed amount. For Kenya the high potential agricultural area is less than a third of the
country’s surface area. The cultivable area per person is therefore limited. The
cultivable area per head is also decreasing over time due to land subdivision and
population increase. Development, both at the individual and societal levels, involves
a re-organisation of the allocation of the available resources among alternative uses so
as to achieve some desired objective(s).

In summary, Farm Planning helps a farmer to do the following six things in an

organised, systematic and effective way:
(i) To think about herself or himself and gather ideas on the alternative methods and
practices that might be useful to him in his/her farming activities.
(ii)To examine carefully his/her existing resource situation and past experience as a
basis for deciding which of the new alternative enterprises and methods fit his/her
situation best.
(iii) Make rational decisions on what to do within the framework of new ideas and
opportunities and his/her particular resource position.
(iv) To identify clearly the various levels of input requirements for his/her
alternative plan(s). These inputs include labour, cash, seeds and biocides (fertilisers
and pesticides). S/he can use the projected input levels to identify whether to finance
credit from the farm plan.

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(v) It gives him a notion of the expected net farm income. An increase in the expected
net farm income may act as an incentive for better future planning.
(vi) It provides him with a basis for comparing his/her actual performance and to
correct any deviations before undue harm is done to the business. In this sense, it
helps the farmer to control the implementation of the plan.

Types of Farm Plans

Farm plans may be formal or informal. Informal farm plans are based on experience
alone without any attempt being made to write them down. Informal farm plans are
therefore in mental rather than written form. Informal plans are suitable for small
business concerns where the planner has complete knowledge of the business. As
farming becomes more complicated the need for formal or written plans becomes
more evident. A written farm plan should show the crops to be grown, the livestock
to be raised, the practices to be followed in their production, the programme for the
use of labour, the investment to be made in equipment and machinery and similar
details about the use of other farm resources.

Features of a Good Farm Plan There are certain desirable features of farm plans. A
good farm plan has the following features: -

(i). It should provide for the efficient use of farm resources such as labour, land,
power and equipment.
(ii). It should have a balanced combination of enterprises. In this regard, it should;
(a). Provide for minimum production of various classes of crops. (b). Help maintain
and improve soil fertility. (c). Help raise and stabilise farm earnings and (d). Improve
the distribution and use of labour, power and water requirements throughout the year.
(iii). It should avoid excessive risks.
(iv). It should provide flexibility – Flexible farm plans enable the farmer to take
advantage of changes in the environment.
(v). It should make use of the farmer’s knowledge, training and experience and take
account of the farmer’s likes and dislikes.
(vi). It should provide a programme of obtaining, using and repaying credit.
(vii). It should provide for the use of the most current agricultural technology.
(viii). It should consider efficient marketing facilities. For any farm plan to be
implemented successfully there is need to stress that it should be tailored to meet the
farmer’s objectives, management standards, outlook and circumstances.

For the plan to have the farmer’s outlook in it, the planner has to cultivate a good
rapport with the farmer. The final decision on the implementation of the plan rests
solely with the farmer! The farmer stands to lose or gain from the implementation of
the plan. his/her full participation in making the plan improves the chances of
successful implementation of the plan. Plans that are made and not implemented are a
waste of the resources used in the planning process!

Farm Planning Techniques The typical Farm Management problems with which
farmers are faced are what to produce, how to produce, how much to produce and
when to produce. Farm planners may use several tools or aids or techniques to solve
these Farm Management problems. These techniques may be used either under
perfect knowledge or under risk and uncertainty (imperfect knowledge). The
techniques used under perfect knowledge are put into three broad categories:

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Production Function Models, Budgeting Techniques, and Mathematical

Programming. There are several production function models that can be used to
arrive at the optimal levels of resource use (combination) for the enterprises
undertaken. Production functions may be of Linear, Constant Returns, Decreasing
Returns, Increasing Returns, Constant Elasticity of Substitution and Leontief forms.
Budgeting may be either partial or for the whole farm. Mathematical programming
Methods may be Linear, Non-Linear, Dynamic, Integer and Recursive Programming.
Programme Planning may also be considered as a Mathematical Programming
Method.

Farm planning techniques used under condition of imperfect knowledge include

Modified Mathematical Programming Models, Diversification Models, Probabilistic
Models and Game Theory Models. In this unit, we shall discuss Budgeting and
Programme Planning. This is not to admit that the other techniques are not relevant to
our country. It is an admission that the other techniques are difficult for farmers to
understand and have high mathematical burden, often necessitating the use of
personal computers.

Lack of reliable data limit the accuracy of farm planning in Kenya. As our
agricultural sector becomes more commercial and data that are more reliable are
gathered, these methods become more relevant to our needs. Few, if any, planning
techniques are relevant to subsistence farmers. The objectives of subsistence farmers
are difficult to quantify thereby limiting the usefulness of these techniques to Kenyan
farmers. A substantial proportion of the country’s farmers are subsistence oriented.

Budgeting
Budgeting may be defined as an estimation of the expected returns from and costs of
a proposed pattern in the use of a set of farm resources. It also considers the net profit
(income) of the farm. Budgeting may be carried out for the whole farm or for a part
of it. The former is referred to as Complete Budgeting while the latter is referred to as
Partial Budgeting. These forms of budgeting are examined in the rest of this chapter.
Cash Flow Budgeting and Break Even Budgeting are also discussed in this chapter.
Illustrations on how to prepare them are given to show the range of applications to
which they can be put. The different budgeting techniques can be represented in the
form of Fig. 2 below.

Fig 2: Farm Planning and Budgeting Techniques

Partial Budgeting

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This is a method for estimating the likely effects, in monetary terms, which changes in
policy or prices in part of business may have upon the future profitability of the
business. It is relevant both to primary production such as farming and to other forms
of businesses. Partial Budgeting mainly aids the Farm Manager in deciding whether
to continue with a proposed change in the combination of enterprise (product
substitution) and in the production methods (input substitution). Budgeting Partial
Budgeting Complete Budgeting Cash Flow Budgeting Break Even Budgeting15
Partial budgeting only looks at the changes in costs and receipts, and thus net farm
income, likely to result from a minor change to the farming system. Most farmers
prepare partial budgets when considering whether to adopt a technology that does not
result in major changes in the farming system.

The results of such budgeting exercises influence farmers’ adoption, or otherwise, of

those technologies. Partial budgeting serves to prevent unprofitable changes being
made. It also serves as a target against which future performance is compared. It is
important in partial budgeting to be systematic, to head the budget clearly and to state
clearly any assumptions made.

Four basic questions must then be answered:

 What new costs would arise?
 What former costs would be saved?
 What former income would be lost?
 What new income would arise?

If these questions are answered, then there should be few errors, if any, in the budget.
In some situations, no saved costs and loss in the former income are present. This is
possible when introducing a new technology. There are generally two ways of
presenting answers to the above questions. The standard layout of a partial budget is
in the form of a T Account. It may also be presented in a narrative style. These styles
are shown below.

Standard Format

The two sides of the partial budget must balance. If the balancing figure comes on the
left hand side then the budget indicates that an extra income is likely to be achieved
by adopting the proposed change. On the other hand, if the balancing figure comes on
the right hand side then the budget indicates a loss of income for the projected policy.

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The budget should show only the items that will actually appear or alter in the ‘future
trading account.’ The costs to be shown on the partial budget are only the variable
ones. In this connection, the capital costs of fixed assets are not shown on the budget.
Only the annual changes resulting from investments on the fixed assets need to be
included in the budget. These costs are mainly average depreciation, interest, repairs
and maintenance on any extra capital assets bought.

If a proposed change does not need investment in extra buildings or machinery, the
annual running costs of existing buildings and machinery should be excluded from the
budget. In costing capital in a partial budget, interest is often charged at the current
bank overdraft rate. During times of high inflation, this practice leads to results that
are heavily biased against capital investment. To solve this problem a ‘real’ interest
rate is charged on capital.

This is calculated as follows: -

r = (n-i ) / (1+i)
 
Where r = real interest rate, n = Nominal interest rate and i = inflation rate Thus a
nominal rate of 20 per cent interest associated with an inflation rate of 15 per cent
implies a real interest of (0.2 – 0.15) / (1+ 0.15) = 0.0435 or 4.35%.

Narrative style

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ABT411 Dr. Anderson

Complete Budgeting
Complete budgets are estimates of the expected income (returns) and costs for the
whole farm. All receipts and expenses expected to be incurred are included in the
complete budgets. Complete budgeting is useful in three situations: -
(a) When a plan for a ‘new farm’ is needed.
(b) When a large change is being considered that would affect most, perhaps all, the
farm costs and receipts.
(c) When the potential of an existing farm needs to be assessed for the purposes of
tenancy or checking the actual performance.

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Complete budgeting helps the farmer to do the following in as precise a manner as

possible:
(i) To forecast future profits and losses.
(ii) To estimate the future capital need of the business when seeking credit.
(iii)To assess future tax commitments.
(iv)To set up and work a system of budgetary control.
(v) To compare the likely financial effect of a proposed large change with the present
system.

This method considers all the crops, livestock production methods and estimates costs
and returns for the farm as a whole. For that matter it is often referred to as Total (Full)
Budgeting. In full budgeting farmers, consider all the enterprises simultaneously.
The complete budget can be worked out for the farm for any period, usually a year.
Since complete budgets include the entire farming system all physical data, costs and
returns must be estimated for the farm. If adequate farm records and accounts are
available, it may not be necessary to prepare a new budget for the existing system. For
a new system being started, there may be no data to use and in which case it is
necessary to compare budget for alternative systems to find the one that suits the
existing resources and objectives.

Steps in Complete Budgeting

The procedure used to arrive at the complete budgets may be divided into six steps.
These
include: -
(i)
Listing of the quantities of the available resources and stating objectives: Farmers
have different and often conflicting objectives and goals. These need to be clearly
defined. At this stage, the farmer estimates the amount of various factors of
production that are available on the farm. To the ones available on the farm are then
added those that can reasonably be expected to be mobilised from elsewhere. During
this stage, the farmer tries to categorise land into as similar units as possible. For
instance, land may have different topographies, soil types and different problems such
as salinity. Those characteristics influence the suitability of different fields to different
uses.
(ii)
Estimation of crop areas and livestock numbers: During this stage, a decision is
made on the areas of different crops that will be grown and livestock number that will
be kept. The size of each enterprise must be worked out while bearing in mind the
farmer’s tastes and tastes and preferences, managerial ability and labour availability.
If the farmer’s objectives, managerial ability and availability of labour force are not
borne in mind then the plan will not be implemented. It is people who implement plan
and therefore the plan must be made to suit them! Those activities that the farmer
Complete Budgeting
Complete budgets are estimates of the expected income (returns) and costs for the
whole
farm. All receipts and expenses expected to be incurred are included in the complete
budgets.
Complete budgeting is useful in three situations: -
(a)
When a plan for a ‘new farm’ is needed.

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(b)
When a large change is being considered that would affect most, perhaps all, the farm
costs and receipts.
(c)
When the potential of an existing farm needs to be assessed for the purposes of
tenancy or checking the actual performance.
Complete budgeting helps the farmer to do the following in as precise a manner as
possible:
(i)
To forecast future profits and losses.
(ii)
To estimate the future capital need of the business when seeking credit.
(iii)
To assess future tax commitments.
(iv)
To set up and work a system of budgetary control.
(v)
To compare the likely financial effect of a proposed large change with the present
system.
This method considers all the crops, livestock production methods and estimates costs
and returns for the farm as a whole. For that matter it is often referred to as Total (Full)
Budgeting. In full budgeting farmers, consider all the enterprises simultaneously.
The complete budget can be worked out for the farm for any period, usually a year.
Since complete budgets include the entire farming system all physical data, costs and
returns must be estimated for the farm. If adequate farm records and accounts are
available, it may not be necessary to prepare a new budget for the existing system. For
a new system being started, there may be no data to use and in which case it is
necessary to compare budgets for alternative systems to find the one that suits the
existing resources and objectives.

Steps in Complete Budgeting

The procedure used to arrive at the complete budgets may be divided into six steps.
These include: -
(i)
Listing of the quantities of the available resources and stating objectives: Farmers
have different and often conflicting objectives and goals. These need to be clearly
defined. At this stage, the farmer estimates the amount of various factors of
production that are available on the farm. To the ones available on the farm are then
added those that can reasonably be expected to be mobilised from elsewhere. During
this stage, the farmer tries to categorise land into as similar units as possible. For
instance, land may have different topographies, soil types and different problems such
as salinity. Those characteristics influence the suitability of different fields to different
uses.
(ii)
Estimation of crop areas and livestock numbers: During this stage, a decision is
made on the areas of different crops that will be grown and livestock number that will
be kept. The size of each enterprise must be worked out while bearing in mind the
farmer’s tastes and tastes and preferences, managerial ability and labour availability.
If the farmer’s objectives, managerial ability and availability of labour force are not
borne in mind then the plan will not be implemented. It is people who implement plan

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and therefore the plan must be made to suit them! Those activities that the farmer
must take irrespective of their profitability are referred to as predetermined. In some
instances different and completing resource use patterns can be stated.
(iii)
Estimation of the technical coefficients and yields: In this stage, the planner
estimates the resource requirements per unit of an enterprise and the yield there from.
These are expressed in physical terms such as man-days per acre and Kg per Ha. This
kind of information should be obtained from specialists in various fields of
agriculture. The data can be obtained from research stations, on-farm trials, and crop
cutting experiments, Farm Management surveys, farmers' own trials, past experience
and extension agents. The best data are from the farmer’s own experience and trials.
Different processes may result in different input-output data. The processes
(technology) leading to the production of a commodity needs to be clearly specified
for two sets of data to be comparable. The total resource requirements and output are
obtained from these data and those on enterprise sizes.
(iv)
Estimation of factor and product prices and calculation of costs and returns:
Prices used in the budget should be as realistic as possible. It is usually a difficult task
to arrive at a realistic price. Several strategies may be adopted to circumvent the
problem. The current prices may be used, an average of the last three years
constructed and an appropriate future – price obtained. These prices are then applied
onto the physical input and output data to obtain the expected costs and returns.
(v)
Estimation of fixed costs: Some costs may be difficult to allocate between different
enterprises. These costs include those of management and permanent labour. Others
are machinery, rent and other general overheads.
(vi)
Organising and laying out the previous information into an easily readable and
understandable format: This simply involves summing and writing out the budget
in a form that can be readily understood. This step involves setting out the
information, totalling the costs and returns and calculating the expected profit from
the (or each) plan. If the budget is to be of any value, it should include important
physical and price assumptions without being too lengthy.

The full layout of the complete budget is of the following form:

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For Katulye Best Farm Ltd a contingency allowance of 10% was made to account for
any unexpected changes (increases) in the input costs. The farm budget shows that it

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is possible to realise about Kes 928,000 per annum as net profit. This is a reasonable
return on capital. The steps leading to this budget have not been shown for the sake of
convenience.

FARM LAYOUT

This is the location and arrangement of the farmstead (Homestead), fields, water
systems, soil conservation structures, other farm structures and roads and paths in
relation to one another.
The layout of the farm needs to be efficient since it directly affects:
 Costs and efficiency in the use of man power, animal draft and machinery.
 Costs and efficiency of irrigation, drainage and fencing.
 Cropping plan and profitability of the farm as a whole.

The farm layout influences the efficiency in the use of manpower, animal draft and
machinery by exerting an influence on the efficient use of time. The farm layout
adopted by a particular farmer depends on several factors. These are briefly outlined
below:
(a) Climatic Factors: – Three aspects of the climate need to be borne in mind when
planning the farm layout. Firstly, the direction of the flow of wind influences the
location of animal housing. Animal houses need to be located on the leeward side to
avoid unpleasant odours and to enable the animals, especially poultry, to feed
optimally. Secondly, the farmstead needs to be located on high ground that is not
prone to flooding. The crop enterprises located on the areas prone to flooding need
to be able to withstand this type of water stress. Thirdly, the livestock houses need

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to be located in 2526 such a way as to avoid extreme temperature variations.

Locating the livestock houses in such a manner that it is possible for sunlight to light
the houses in the mornings and evenings has a positive influence on egg laying.
(b) Technical Factors: - There are several technical factors that the farm planner has
to bear in mind while laying out the farm. To ensure that long-term objectives of the
farm are not compromised it is necessary to ensure that soil fertility is maintained.
Designing the fields so that tillage operations and the rows run across the slope
rather than up and down the slope can do this. In addition, the soil nutrients taken up
by the plants need to be replenished by the addition of fertilisers, organic or
inorganic. The farm also needs to be divided into fields to take advantage of the
‘usefulness’ of crop rotation. In the same vein, the farm (home) stead should be
located in the less fertile area of the farm. To achieve effective crop rotation, the
fields should be equal in number to or a multiple of the number of years of the crop
rotation programme.
(c) Economic Factors: – In laying out the farm there is need to minimise on the costs
of fencing, machinery and labour movement and on farm structures. To lower or
optimise the costs of fencing the fields should be rectangular. Rectangular fields are
also economical in the use of machinery and the movement of labour. Efficiency in
the use of machinery therefore needs rectangular fields. Roads and paths should be
located in such a manner that they ensure easy accessibility to all parts of the farm
without leading to waste of land. There should be minimum loss of productive land
to fence and rows. For the use of large machinery to be efficient, the fields need to
be as large as possible.
(d) Human Factors: – The planner need to take into account the tastes and tastes of
the farmer. For reasons of being unable to obtain food crops when required in the
market, a farmer may prefer to grow certain food crops on the farm even if it is not
profitable to do so. Due to the culture of a community, some farmers may prefer a
particular type of homestead layout. For reasons of the security of the tree crop
enterprises, a farmer may prefer locating them as near as possible to the homestead.

Steps in Planning the Farm Layout Four steps are followed to arrive at the farm
layout. These are: -
(1) . Selection of the enterprises to be undertaken - This may be based on
economic principles or the farmer’s tastes and preferences or a combination of the
two. The optimal combination of enterprises can be arrived at using various
programming methods.
(2) . Drawing of the crop rotation programme – The number of fields should
equal or be a multiple of the number of years in the programme. The crops grown
should ensure the maintenance of soil fertility.
(3) . Drawing of the farm map– This involves marking on a piece of paper all
the required components. The farm map gives a visual impression of the whole
location of the farm business.
(4). Marking on the ground what is indicated on the map – This may involve
some surveying. It may be unnecessary to mark on the ground the farmstead where
a farmstead has already been located. This step is therefore only applicable to new
farms or those that are being re-organised.

CASH FLOW BUDGETING

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Cash Flow Budgeting has several names. The terminology is synonymous with cash
budgets, cash flow profiles, capital diaries, cash flow plans, and cash flow charts and
cash statements. It is one of the financial statements prepared for a business. Cash
Flow Budgets are forecasts of the cash position of the business for the immediate
period ahead. It sets out the cumulative cash position as transactions occur, in
similarity to the bank statement. It is designed to show the future ebb and flow of
cash and to show when funds should be borrowed and when there is likely to be
surplus cash. It is merely a forecast of the expected flow of money into and out of
business. It is prepared by adding to the expected cash balance at the start of each
period all the cash receipts expected during that period and from this total is
subtracted all the expected payments for the period. The cash flow budget thus
clearly shows the pattern of income, expenditure and repayment of creditors.

Cash flow budgets predict expected inflows and outflows of cash and show whether
cash resources will suffice to meet commitments. To forecast short-term cash flow
one starts with the actual balance at the end of the last period, estimates the cash
likely to flow in and out of the business during the current period and so forecast the
balance at the end of the current period. This is continued for several periods a head.
Having planned the whole farm expected physical inputs and outputs are valued and
allocated to the expected periods. Receipts and expenses are usually split into
operating and capital items.

Capital items are those with expected lives of over one year. Expense items,
sometimes called negative cash flows, usually exceed receipt items in number.
Operating receipts are usually broken by enterprise. During each period, the net cash
flow is total cash inflows less total cash outflows. The net cash flow shows the likely
effect of trading during that period on total cash availability. The cumulative net cash
flow is the forecast cash available at the end of each period.

The maximum value of the negative cumulative cash flow determines the peak credit
needs.

Cash flow budgets can be prepared for any period.

Cash flow budgets have the following advantages:

 They show the likely timing of peak cash needs
 They show whether capital expenditure can be financed internally or not.
 They reveal the availability of cash so that advantage can be taken of cash
discounts or surplus cash can be invested.
 They enable one to forecast interest charges accurately.
 They enable one to quickly see deviations from the plan by comparing it
with the actual cash flow.
 They increase the likelihood of one’s loan application being approved.
 They reveal opportunities for adjusting purchases and sales to reduce peak
cash and credit need and to minimize tax liability.
 Capital budgets may also be used to assess the return on capital using the
discounting and compounding techniques.

Only one variable in the equation can be calculated at a time. In the last equation

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above, at least values of three variables have to be known or assumed for the value
of the fourth variable to be calculated.
Advantages of Budgeting
As we have seen before, a budgetary system gives an organization several
advantages. These include:
(i).
It forces managers to plan;
(ii).
It provides information that can be used to improve decision making;
(iii).
It provides a standard for performance evaluation; and
(iv).
It improves communication and coordination.

Budgeting forces management to plan for the future. It encourages managers to

develop an overall direction for the organization, foresee problems, and develop
future policies.

GROSS MARGIN ANALYSIS

The concept of gross margin is based on the idea that while it is conceptually easy to
allocate costs to different enterprises it is empirically difficult to do so in multi
product farms. For the purposes of gross margin analysis costs are put into two
broad categories” Variable and common (fixed) costs. Variable costs are usually
also avoidable and are the cost of the variable inputs (factors of production). For
instance, the cost of seed and fertiliser used for maize production varies with the
area of the crop planted. These costs can be avoided entirely if no maize is
produced. On the other hand, fixed costs once incurred cannot be easily avoided.
Fixed costs are also usually not specific to enterprises. The table below shows
typical variable and common costs in farming.

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Depreciation contains both common and variable cost elements. To calculate the
marginal cost of a change, these need to be separated. The cost of using fixed assets;
regular and non-specific labour and electricity may be treated as either common or
variable according to the circumstances and availability of physical records. The basis
of gross margin analysis is that the farm is seen as a group of independent, productive
enterprises, centred on farm the unit, which provides common services and the
necessary co-ordination.

Strictly speaking, gross margin is the difference between the value of production and
the marginal cost of that production. For practical purposes, however, it is taken as
difference between the value of production or gross income and variable costs.
Provided common costs stay constant then any increase in whole farm gross margin
will raise profit by exactly the same amount.

Consequently, provided an enterprise has a positive gross margin, it may be worth

keeping even if its total costs, including overheads, exceed the value of production. It
would be better, however, to replace it with an enterprise having a bigger gross
margin. This statement breaks down where an enterprise provides a constant future
stream of benefits while it has a negative gross margin during the first few years of its
production cycle.

This is true of dairy, beef, citrus and other fruit trees with relatively long production
cycles or gestation periods. The Net Present Values of the income obtained for these
enterprises is that is of relevance in such circumstances.

Gross margin analysis may be summarised diagrammatically as below: -

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The net farm income is sometimes referred to as net profit or net income. It is the
income from the business that pays for the farmer and his/her family’s physical and
managerial effort and interest on his/her capital invested in the business. It includes
the value of farm products consumed by him and his/her family and is therefore not
necessarily only cash income. Net farm income will disappear completely if the
whole farm gross margin is too small to cover the common costs. Unless the
resulting short fall is made good from the outside sources there will be a reduction in
the capital employed in the business.

The gross income for an enterprise is also known as the gross output. It has two
elements, the yield of the enterprise and the price of a unit of the output. The output
(yield) of an enterprise, in some circumstances may be sold or consumed or stored.

For non-perishable products, the output for any period may be obtained as the
difference between the sums of the products consumed, those sold or given away
and those remaining at the end of the period and the balance at the beginning of the
period.

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Hypothetical Gross Margins for Kazi Moto farm enterprise

The table shows that among the three crops undertaken, the one with the highest
gross margin per hectare is sweet potatoes, followed by pepper and Kales. In term of
returns to labour, sweet potatoes have the highest returns followed by Kales and
Pepper. The enterprise with the highest G.M. / T.V.C is sweet potatoes followed by
pepper, Kales and goats. These findings imply that it would be desirable to increase
the area under sweet potatoes subject to the availability of capital, labour and
market. The gross margin of livestock enterprises is usually expressed per unit of the
enterprises. It is thus usually expressed per head of livestock for the purposes of
comparison.
Gross margins are useful for comparing enterprises that have a production cycle of a
year or less. When it is less than a year, the actual period for, say, growing French 36
Beans is used. This enables costs and returns to be directly related to a particular
crop or batch of livestock. If the production cycle is more than a year then it is
necessary to use the techniques of compounding and discounting before comparing
the performance of the enterprises.
The table shows that among the three crops undertaken, the one with the highest
gross margin per hectare is sweet potatoes, followed by pepper and Kales. In term of

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ABT411 Dr. Anderson

returns to labour, sweet potatoes have the highest returns followed by Kales and
Pepper. The enterprise with the highest G.M. / T.V.C is sweet potatoes followed by
pepper, Kales and goats. These findings imply that it would be desirable to increase
the area under sweet potatoes subject to the availability of capital, labour and
market. The gross margin of livestock enterprises is usually expressed per unit of the
enterprises. It is thus usually expressed per head of livestock for the purposes of
comparison.

Gross margins are useful for comparing enterprises that have a production cycle of a
year or less. When it is less than a year, the actual period for, say, growing French 36
Beans is used. This enables costs and returns to be directly related to a particular
crop or batch of livestock. If the production cycle is more than a year then it is
necessary to use the techniques of compounding and discounting before comparing
the performance of the enterprises.

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