Financial Management for a

Small Agribusiness
A training manual

Asst. Prof. Najibullah HASSANZOY

July 14, 2013
 About this Manual

This training manual is designed for female agribusinesses running

their own small home-based agribusiness. The manual provides

essential concepts relating to financial and accounting affairs of a

small agribusiness enterprise. Its contents are made simpler so as to

facilitate understanding of the audience in question.

About the Author

The author is an assistant professor of agricultural economics in

Kabul University. He has obtained his B.Sc. in the field of agricultural

economics & extension from Kabul University, and his M.Sc. in the

field of agricultural economics from a recognized university of India.

In addition to teaching various courses at Kabul University, he has

worked on various positions (manager, consultant, training

facilitator, and instructor) with different non-governmental and

international organizations.

Contact Information:
Mobile: 0093 (0) 771695956 Email: hassanzoyn@gmail.com

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 1. Introduction

Starting and running a new agribusiness requires, among others, adequate

financial resources. If an agribusiness is to be profitable, it should have sufficient
financial resources. Remember the old saying, “it takes money to make money.”
Money is required in every area of an agribusiness, including payments for land,
buildings, equipment, livestock, crops, and operating expenses. Personal savings
and credit are the two main sources of financing an agribusiness enterprise. Small
farmers can hardly save, therefore, they need credit to finance their agribusiness.
Majority of afghan farmers are small, conventional and subsistence characterized
by small holding size, low productivity, lack of access to improved agricultural
technologies, lack of access to credit on reasonable terms, limited information,
no or negligible marketable surplus, severe problems in marketing of their
products, and so on. Hence, small farmers are in dire need of support and help
from government, private sector, and international community.

Entrepreneurs accepts risks in starting a new business venture with a purpose to

make a profit. Running a business involve various transactions (buying, selling,
etc.) and operations to meet the business objectives. Keeping accurate records
of business transactions is vital to the success of an agribusiness venture. These
records allow tracking of the financial position and profitability of an agribusiness.

2. Need for Credit

In the agricultural industry, financing is needed in three areas: fixed expenses,

operating expenses, and startup expenses. Fixed expenses are items that can be
used over and over for a long period of time, incurring the same price (expense)
each year. Examples of fixed expenses include land, buildings, machinery and
equipment, tools, and fixtures. Usually a large amount of money is borrowed for
fixed expenses. Operating expenses cover everything needed to run a farm,
ranch, or agribusiness. The amount of money needed depends on the size of the
operation. For farmers, operating expenses are figured on yearly or seasonal basis.
A wheat growing farmer would need money to purchase seed, fertilizer, and
chemicals and to pay workers. Startup expenses are payable before the business

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begins operations. Examples of such expenses include registration fees,
incorporation expenses, and costs for the development of a site. Startup expenses
do not include the initial cost of land and other fixed items.

Afghan famers do not have access to credit on reasonable terms, and often lack
information regarding sources of credit. Farmers, therefore, obtain necessary
amount of money from local moneylenders on high interest rates. This could be
one of the major hindrance in front of agricultural development. Credit allows
farmers to: increase production; improve the quality of what is produced; access
improved agricultural technologies; and revise operations to make them more
profitable.

3. Three Fundamentals of Credit

There are three credit fundamentals each starts with the letter R. Hence, in credit
there are three R’s: returns, repayment, and risk.

3.1. Returns: the main reason for borrowing money is to increase net returns
and make a profit. An agribusiness manager must carefully choose
among the best alternatives when considering credit. Money should not
be borrowed based on quick, thoughtless decisions.
3.2. Repayment: agricultural lenders expect their money to be repaid in full
plus interest. It is crucial for an agribusiness venture to determine its ability
of repaying loans. Priority should always be given to loans that have
earning capacity. For example, borrowing for a dairy cows would take
priority over borrowing for automatic feeders to replace hand feeding.
3.3. Risk: borrowers with strong assets can take on more risk than those with
few assts. It is only reasonable that lenders tend to favor individuals in
the agricultural industry who have enough stability to absorb a potential
loss.

4. Rational Credit Principles

Applying the following principles, wisely, can lead to success and profitability for
an agribusiness and farmers:

1) Use credit for productive purposes – purposes that increase income.

2) Limit borrowing on unfamiliar enterprises.

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 3) Use credit where it will generate the highest return within reasonable risk limits.
4) Know your own business situation.
5) Keep debt in line with income and repayment capacity.
6) Shop for loans and select a dependable lender.
7) Be businesslike, honest, and fair in credit dealing.

5. Types of Loans

A loan is basically a contract between borrower and lender. Loans usually fall into
three borrowing timeframes: short-term, intermediate term, and long term.

5.1. Short-term loans are distinctive in that their terms are normally one year
or less. The main use of the short-term loan is to finance operating inputs.
Banks, individuals, merchants, and farm credit services are among the
suppliers of short-term loans. In business applications, short-term or
operating credit assists in purchasing items such as fuel, fertilizer,
chemicals, and seed, and in meeting maintenance expenses. Short-
term credit may be the most important type for the survival of an
agribusiness, because it finances the everyday operations of the firm,
which generate the cash flow in the business.
5.2. Intermediate term loans vary in length from 1 to 10 years. They finance
assets that may be depreciable over their expected lives. Farm
machinery and equipment, breeding livestock, irrigation systems, and
any modernization of farm facilities are examples of these assts.
Commercial banks and farm credit institutions are suppliers of
intermediate term loans. A lender may require collateral when
considering whether to grant a loan.
5.3. Long term loans are loans that extend over 10 years. Purchases of land,
buildings, and housing create the need for this type of credit. Typically,
the credit instrument used in long-term financing is a mortgage.
Businesses and individuals both use mortgages for long-term financing
needs. Long term credit is especially important when starting an
agribusiness.

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 6. Sources of Credit

Generally, formal or informal sources supply loans to individuals and firms. Formal
sources include commercial banks, agricultural and rural development banks,
and microfinance institutions. Informal sources of credit include local
moneylenders, traders, relatives, and friends. Although banking sector is rapidly
growing in Afghanistan, yet majority of farmers do not have access to credit on
reasonable terms. Hence, framers mostly relies on informal sources of credit.
Establishment of agricultural bank will, to a greater extent, solve credit problems
of farmers and agribusinesses. At present, some organizations and agencies
including ministry of Agriculture, Irrigation, and Livestock (MAIL) provide credit to
Afghan farmers and agribusinesses, but their services are limited to a small number
of farmers, leaving majority of small and marginal farmers uncovered.

7. Preparing a Household Budget

A budget is simply a plan for spending and saving money. That is, an accurate
written outline of income and expenses. A good budget is an essential tool in
every household. Some of the benefits of a budgets are as follows:

1) A budget puts you in control of your financial future.

2) A budget ensures that you do not spend more than you earn.
3) A budget helps you prepare for major periodic expenses such electricity
bill, insurance, and vacations.
4) A budget helps you save money to prepare for unpredictable expenses,
such as medical bills, major car repairs, pest control, etc.

A household or family budget can easily be prepared by outlining all income, and
expenses & savings. The total income must equate total expenditures and savings.
Table 1 presents a hypothetical example of a household budget.

8. Preparing an Enterprise Budget

An enterprise budget generally has three components: gross income, costs (fixed
and variable), and net income. To estimate gross income, a manager should
estimate total production or output as well as expected per unit price of output.
When making these estimates, assume normal conditions, and be as realistic as
possible. For estimation of costs, a manager must determine and list all expected

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fixed1 and variable2 costs. The last step in preparing an enterprise budget is to
calculate net income by deducting total costs from gross income. Table 2
provides a hypothetical example of an enterprise budget.

Table 1. A hypothetical Example of Household Budget.

Household Budget
Name: Ms. Shilla
Time Period: June - July, 2013
Income (after taxes)
1. Sales Afs 15,000
2. Part time Job Afs 8,000
3. Others Afs 2,000
Total Afs 25,000
Expenditures & Savings
1. Savings (emergency/ opportunity) Afs 8,000
2. Food Afs 5,000
3. Transportation Afs 3,000
4. Furniture Afs 4,000
5. Children’s School Fees Afs 3,000
6. Miscellaneous Afs 5000
Total Afs 25,000

Table 2. A hypothetical Example of Enterprise Budget.

Enterprise Budget for Strawberries Production (1 hectare)

Income
Sale of 2500 kg (strawberries) @ Afs 100 per kg Afs 250,000
Costs (fixed and variable)
Seedlings Afs 2,000
Fertilizer Afs 2,500
Labor Afs 6,000
Packages and packaging expense Afs 25,000
Transportation cost Afs 10,000
Tractor expense Afs 1,500
Insurance Afs 15,000
Miscellaneous Afs 12,000
Total costs Afs 74,000
Net Income/Estimated Profit Afs 176,000

1 Fixed costs are those that do not change with the level of output such as taxes, insurance, etc.
2 Variable costs are those that varies with the level of output such as fertilizers, seed, fuel, etc.

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 9. Agribusiness Record Keeping

Entrepreneurs accepts risks in starting a new venture with a purpose to make profit.
Running a business involve various transactions and activities to meet business
objectives. Keeping accurate records of business transactions is vital to the
success of an agribusiness. Such information allow agribusiness managers or
owners to take informed decisions. Given the size of their business and education
of the female agribusinesses, a small home-based agribusiness does not require
too much complicated bookkeeping and accounting system. A simple and easy
bookkeeping mechanism is appropriate for them. The manager of a home-based
agribusiness can simply list its business transactions and classify them into two or
more categories such as sales, purchases, liabilities, etc. Table 3 provides an
example of a record keeping system for small home-based agribusiness.

Table 3. A Record Keeping System for Small Home-based Agribusiness.

Date Transaction Explanation Quantity Unit Price Total Amount

Purchases/ Costs
May 10, 2013 Purchase of chemicals 120 kg Afs 30 Afs 3600

Sales/ Revenue
July 4, 2013 Sale of strawberries 20 cartons Afs 200 Afs 4000

Liabilities/ Loans
April 16, 2013 Loan from Agril. Bank Afs 20,000

10. Essential Financial and Accounting Terms

10.1. Income
Income or revenue is the amount of money received in payment for goods or
services or from other sources (profits, loans, and credit). Suppose Ms. Shilla owns
a small family farm producing strawberries. This year she received Afs 5000 from
the sale of her strawberries in the nearby local market. This amount of money
constitute Ms. Shilla’s total income.

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 10.2. Expenses
Expenses are costs incurred in earning revenue for a particular financial period.
To produce goods or services, entrepreneurs have to purchase certain inputs, pay
wages, salaries, taxes, rent, etc. these all make business expenditures. In the
continuation of the previous example, suppose Ms. Shilla paid Afs 100 for
Seedlings, Afs 300 for wages of labor, Afs 200 for chemical fertilizers, and Afs 400
for packages. This total amount of Afs 1000 constitutes her business expenditures.
10.3. Net Income
Net profit or income is the amount of money remains after deduction of total
expenditures from total income is called net income. Using figures of the previous
example, Ms. Shilla’s net income will be Afs 4000 (5000 – 1000).
10.4. Assets
Assets are items of value that are owned by the business. Some example of assets
are cash, receivables, inventory, equipment, buildings, and prepaid accounts.
10.5. Liabilities
Liabilities are business obligations to external parties. Examples of liabilities include
accounts payable, notes payable, and mortgages.
10.6. Capital
Capital is the investment that the owner has made or put into the business. For
example, money used to start the agribusiness is capital. It also include machines,
tools, and buildings.
10.7. Owner’s equity/ Net Worth
Owner’s equity is the difference between total assets and total liabilities.
10.8. Inventory
An inventory is a physical count of all the assets of a business along with their
estimated worth, the aggregate of these items is known as inventories (goods,
and assets). The term Inventory is also used for the goods that will be sold in the
ordinary course of the business.
10.9. Breakeven Point
The breakeven point is when total receipts equal total costs (or when your
expenditures equal your income), i.e. you neither make profit nor sustain losses.

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 11. Financial Statements

Irrespective of the size of agribusiness, the agribusiness owners and managers

needs up-to-date financial information to make decisions about future operations.
Financial statements provide adequate disclosure of the condition of an
agribusiness. The two most common financial statements are income statement
and balance sheet.

11.1. Income Statement

The income statement is a financial statement showing the revenue, expenses,

and net income of an agribusiness. An income statement measures the profit
gained by an agribusiness over a given time period. This time period is usually one
year, however, monthly or quarterly reports may be desired. Other names for the
income statement are operating statement or profit and loss statement. The three
major components of the income statement are revenue, expenses, and taxes.
The first two components (revenue and expenses) are already defined under one
of the previous headings, i.e. essential financial and accounting terms. The
difference between total revenue and expenses represents taxable income of an
agribusiness. Net income is measured by subtracting fixed income tax expense
from the taxable income. Table 4 provides a hypothetical example of the income
statement.

Table 4. Income Statement of a Hypothetical Agribusiness.

Shilla’s Home-based Agribusiness

Income Statement for the Year 2012
Revenue (Afghani/Afs) Expense (Afghani/Afs)
Sales of seedlings Afs 20,000 Cost of goods sold Afs 15,000
Sales of strawberries Afs 50,000 Labor Afs 2000
Sales of eggs & chicken Afs 15,000 Office expense Afs 3000
Sales of dairy Afs 10,000 Input cost Afs 10,000
Advertising Afs 1,000
Rent Afs 4,000
Insurance Afs 8,000
Others Afs 5,000
Total Revenue (TR) Afs 95,000 Total Expense (TE) Afs 48,000
Net Income Before Tax (TR – TE) Afs 47,000
Income Tax Expense (Income tax = 30%) Afs 14,100
Net Income (Net Income Before Tax – Income Tax Expense) Afs 32,900

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The above example is simplified to suit the circumstances of female agribusiness
owners, possessing small home-based agribusinesses.

11.2. Balance Sheet

A financial statement showing all assets and equities (liabilities and owner’s
equity) of an agribusiness on a specific date is known as balance sheet. The
balance sheet can be prepared whenever the financial information is needed.
However, agribusinesses should always prepare a balance sheet at the end of a
fiscal period. The three major components of a balance sheet are assets, liabilities,
and net worth. A popular accounting equation is that “assets equal liabilities plus
net worth” which always holds true. That is why, this financial statement is given
the name ‘balance sheet’.

The balance sheet has normally two columns. Assets are listed in the left side
column while liabilities and net worth appear on the right side column. Assets and
liabilities have direct values, whereas net worth has an indirect value for it is
calculated from total assets minus total liabilities. The three classification of both
assets and liabilities are current, intermediate and long-term, i.e. current assets/
current liabilities; intermediate assets/ intermediate liabilities; and long-term
assets/ long-term liabilities.

Current Assets and Current Liabilities

Current assets are those assets that an agribusiness manager could convert into
cash within a 12-month period without disrupting business operations. Current
assets include such items as cash, accounts receivable, inventories, and prepaid
expenses.

Current liabilities are debts that must be paid within12 months of the balance
sheet date. Current liabilities include such items as accounts payable, accrued
expenses, and any payment due on loans.

Intermediate Assets and Liabilities

Intermediate assets are those that are normally in service for more than one year,
but less than 10 years. During this time frame, management either depreciates,
liquidates, or replaces the assets. This group includes machinery, equipment,
vehicles, and business furnishings.

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Intermediate liabilities are payable within a time frame of 1 to 10 years. They
primarily involve notes that mature within a 10-year period and taxes levied on
the sale of intermediate assets.

Long-Term Assets and Liabilities

Long-term or fixed assets have an expected life or maturity exceeding 10 years.

These assets include land, buildings, and other permanent improvements. Long-
term or fixed liabilities have maturity periods of more than 10 years. They includes
mortgages3 on land and buildings and other long-term obligations.

Table 5. Balance Sheet of A hypothetical Agribusiness.

Shilla’s Agribusiness Enterprise (Balance Sheet for Jan, 2013)

Assets Amount (Afs) Liabilities Amount (Afs)
Current Assets Current Liabilities
Cash on hand 10,000 Accounts payable 12,000
Savings in bank 8,000 Short term notes
Value of grains ready payable 3,000
for disposal 38,500 Accrued rent 4,000
Livestock products 60,000 Accrued payroll 2,000
Fruits, vegetables, Accrued taxes 2,000
fodder and feed ready 8,000 Annual instalments of
for sale long-term credit 1,500
Sub-total 124,500 Sub-total 24,500
Intermediate Assets Intermediate Liabilities
Dairy cattle 10,000 Livestock loans 8,000
Bullocks 9,000 Machinery loans 15,000
Poultry birds 15,000
Machinery and
equipment 15,000
Tractors 175,000
Sub-total 224,000 Sub-total 23,000
Long-Term Assets Long-term Liabilities
Land 600,000 Tractor loan 120,000
Farm Buildings 25,000 Orchard loan 25,000

Sub-total 625,000 Sub-total 145,000

Total of Liabilities 192,500
Total of Assets 973,500
Net Worth or Equity 781,000

3 Mortgage is a loan using a real asset, such as a house or other buildings, as collateral.

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The example of balance sheet provided in table 5 is somewhat complicated for
small home-based agribusinesses whose owners or managers are mostly
uneducated. Hence, a simplified balance sheet, suiting them, can be prepared
by merely listing the assets and liabilities of the agribusiness regardless of whether
they are current, intermediate or long-term.

References

1. Anthony, Robert N, et al. 2007. Accounting: text and cases (12th edition). Tata

McGraw-Hill Publishing Company Limited, New Delhi, India.

2. Obst, Wesley J, et al. 2007. Financial Management for Agribusiness. Landlinks

Press, Collingwood VIC 3066, Australia.

3. Pandey, Mukesh and Tewari, Deepali. 2010. The Agribusiness Book: a

marketing and value chain perspective. ibdc publishers, Lucknow, India.

4. Reddy, S Subba and Ram, P Raghu. 2010. Agricultural Finance and

Management. Oxford & IBH Publishing Co. PVT. LTD., New Delhi, India.

5. Ricketts, Cliff and Ricketts, Kristina. 2010. Agribusiness: Fundamentals and

Applications (2nd Edition). DELMAR CENGAGE Learning, USA.

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