College of Management

ELEC 324- AGRIBUSINESS

Second Semester, SY 2022-2023

Topics: Financial Management for Agribusiness

I. Understanding Financial Statements
II. Analyzing Financial Statements
III. Financing the Agribusiness
IV. Tools for Evaluating Operating Decision
V. Tools for Evaluating Capital Investment Decisions

SUMMARY
I. Understanding Financial Statements

Profit- amount remaining from a sale after cost of the product and operating expenses have been paid.
Business records- are tools to help managers guide the operation of the business intelligently and make good
management decisions that are consistent with the needs, objectives, and goals of the company
Managerial Accounting- the collection and use of information reported for these purpose.
Accounting period- the accounts in the ledger are summarized on a predetermined regular basis
Balance sheet - a financial summary of what the business owns and owes and of the investment that the owners
have made in the business.
Assets-financial resources that have monetary value
Liabilities- the amount the business owes to creditors
Current assets –is used to designate cash or assets that will be converted to cash during one normal operating
cycle of the business (usually one year).
Cash- Cash funds are those that are immediately available for use without restriction.
Accounts receivable - the total amount owed to the company by customers for past purchases. Essentially,
these accounts result from the granting of credit to customers
Inventory -Inventory is defined as those items that are held for sale in the ordinary course of business or that
are to be consumed in the process of producing goods and services to be sold.
Prepaid expenses - assets that have been paid for in advance; usually, their usefulness is due to end after a short
time.
Fixed assets - are those items that the business owns that have a relatively long life. Fixed assets are typically
used to produce or sell other goods and services.
Accounts payable - amount that owes to vendors, wholesalers, and other suppliers from whom the business has
bought items on account. This category also includes any items of inventory, supplies, or capital equipment
Notes payable - is sometimes labelled as short-term loans or liabilities. It represents those loans from
individuals, banks, or other lending institutions that fall due within a year.
Income statement- it summarizes revenue and expenses during a specific period of time and reports the
accounting loss or profit that results from the deduction of expenses from revenue.
Gross margin or gross profit- represents the difference between net sales and total cost of goods sold. The
gross margin is the money that is available to cover the operating expenses and the interest expense and still
leave a profit.

II. Analyzing Financial Statements

Financial Statements – or financial reports – are a formal, written record of the business and financial
activities of an individual or an organization. These records should be in a structured, easy to understand form as
they often need to be audited by accountants, tax firms, government agencies or potential investors.

Three basic Financial Statements

• A Balance Sheet
• An Income Statement
• A Cash Flow Statement
Financial Statement #1: Balance Sheets formula used is below;
Assets = (Liabilities + Owners Equity)
Financial Statement #2: Income Statements formula used is below;
Net Income = (Revenue – Expenses)

Financial ratios in the four major areas of analysis

Agribusiness managers can use ratios to help monitor financial position and performance.
Four areas are normally explored when financial ratios are used to analyze a firm. These areas are profitability,
liquidity, solvency, and efficiency. The information provided on the firm in each of these areas is presented
below.
1. Profitability ratios
2. Debts Liquidity ratios
3. Solvency ratios:
4. Efficiency ratios

What is Benchmark?
Benchmark: to evaluate or check by comparison with a standard.
Ratio analysis
One of the most important tools for financial analysis is ratio analysis. It permits relative comparisons of
important financial data and relationships, and such relative comparisons can be very insightful.

III. Financing the Agribusiness

Reasons for increasing financial resources.

The ultimate reason for increasing the financial resources of an agribusiness is to increase its revenues, and
ultimately its profits, by generating additional business.

Four types of capital:

1. Short-term loans: one year or less
2. Intermediate-term loans: one to five years
3. Long-term loans: more than five years
4. Equity capital: no due date

The cost of capital

When a business borrows money, it incurs special costs that are paid to the lender. One of these is interest, but
interest is not the only cost of borrowing money. Several other factors affect the net cost of borrowed capital:
1. Repayment terms and conditions
2. Compensatory balances, points, and stock investments
3. The income tax bracket of the firm

Other restrictions
These restrictions vary from requiring monthly and annual financial statements or other financial information
regarding inventories, accounts receivable, and accounts payable to actual restrictions on expending capital
funds without the approval of the lender.
Interest rates and taxes
To know the effective cost of borrowing funds, the manager must know the after-tax cost of interest. This effect
can best be seen by looking at net income after taxes, before and after borrowing.
The leverage principle
Leverage is the concept of financing through long-term debt instead of equity capital. Many managers like to
use debt as a lever against equity as much as possible so that they can maximize the amount of assets or capital
at their disposal.
Determining how much agribusinesses should borrow
Other tools for financing decisions
Two other techniques, or tools, play an important part in financing the agribusiness firm.
Cash flow statement
A cash flow statement is really a projection of the fi rm’s cash inflows and outflows for a future time period.
Budgeting: a tool used to determine future borrowing needs
A budget is a specific forecast of financial performance that is used as a tool for not only control of a business,
but also for determining future borrowing needs and repayment schedules.
Pro forma financial statements
The pro forma financial statements will provide a look into the future of the business and will help the manager
determine what the financial needs of the business will be during and at the end of the operating period.
External sources of financing
• Trade credit
• Commercial banks
• Insurance companies
• Commercial finance companies
• Cooperative borrowing
Types of loans
• Accounts Receivable Loans
• Warehouse receipts
A promissory note is a promise by the borrower to pay to the lender a particular amount of money and a
particular amount of interest after a specified period of time.
Leasing and renting - An alternative to owning a durable asset is to lease that asset.

IV. Tools for Evaluating Operating Decision

Decision-making- the process of choosing between different alternatives for the purpose of achieving desired
goals.

Tools for evaluating operating decisions

1. Problem Identification
2. Summary of facts
3. Identifying alternatives
4. Analysis
5. Action
6. Evaluation

Volume–cost analysis can show the impact of changes in selling price on the volume of business necessary to
reach a certain profit level.
Incremental costs not constant- one difficulty can be variable costs that increase incrementally with sales, but
not along a straight line.
Lumpiness-some costs are lumpy, that is, they are fixed within certain sales volume ranges, but then once a
certain point is reached, a whole new set of fixed costs are incurred.

V. Tools for Evaluating Capital Investment Decisions

Capital investment - addition of durable assets to an agribusiness, which usually require relatively large
financial outlay and will last over a long period of time.

There are the tools for evaluating capital investment:

1. Payback Period (PP) - expected time to recoup the investment.
2. Return on Investment (ROI) - forecasted return from the project as a portion of total cost.
3. Net Present Value (NPR) - expected cash outflows minus cash inflows.
4. Internal Rate of Return (IRR) - average anticipated annual rate of return.
Capital Budgeting- involves identifying the cash in flows and cash out flows rather than accounting revenues
and expenses flowing from the investment. For example, non-expense items like debt principal payments are
included in capital budgeting because they are cash flow transactions.