FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

FARM BUSINESS
MANAGEMENT

BY;
ENGINEER ELIAS WAWERU NGOTHO (BSC.
AGRICULTURAL ENGINEERING, PGDE (EGERTON), MA
PROJECT PLANNING UON), PhD PM&E -UON (ON GOING)

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TABLE OF CONTENT
Table of content--- ...................................................................................................................................... 1
Farm Management ...................................................................................................................................... 3
The meaning and importance of Farm Management .................................................................................. 3
Qualities of a Good Farm Manager ............................................................................................................ 6
Factors Affecting Managerial Effectiveness............................................................................................... 6
How to Improve Managerial Skills............................................................................................................. 7
The farming system and farm enterprises ................................................................................................... 8
Farming as a Business Versus Subsistence Farming .................................................................................. 8
Selecting the Farm Enterprises ................................................................................................................... 9
Types of risks and uncertainties................................................................................................................ 13
Methods of reducing risks and uncertainties (ways in which farmers adjust to uncertainties) ............ 13
Farm Planning........................................................................................................................................... 16
The Need for Planning .............................................................................................................................. 16
Steps Involved in Farm Planning.............................................................................................................. 17
Factors to consider when planning: .......................................................................................................... 19
Planning Techniques and Requirements ................................................................................................... 20
Budgeting as a Method in Planning .......................................................................................................... 21
Farm layout ............................................................................................................................................... 40
Factors to consider when planning a farm layout ..................................................................................... 41
Forms of Business Ownership .................................................................................................................. 45
Partnership ................................................................................................................................................ 45
Sole Proprietorship.................................................................................................................................... 46
Private Companies .................................................................................................................................... 50
State Corporations..................................................................................................................................... 50
Parastatal Bodies....................................................................................................................................... 51
Agricultural Credit .................................................................................................................................... 54
Principles of borrowing............................................................................................................................. 55
Types of credit .......................................................................................................................................... 56
Terms of Credit ......................................................................................................................................... 56
Sources of Agricultural Credit .................................................................................................................. 57
Problems With Agricultural Credit ........................................................................................................... 57
Credit Management................................................................................................................................... 58
Balance Sheet............................................................................................................................................ 59
Profit and Loss Accounts .......................................................................................................................... 70
Financial accounting document ................................................................................................................ 76
Inventory, Valuation and Depreciation..................................................................................................... 81
Application of Law in agriculture............................................................................................................. 93
Concepts of Human Resources Management ........................................................................................... 95
Human resources planning (HRP.............................................................................................................. 96
General Principles of Record Keeping ..................................................................................................... 98
Importance (uses) of farm records ............................................................................................................ 99
Types of records and their uses............................................................................................................... 100
Revision Questions (Farm Management) ............................................................................................... 109
Author’s profile....................................................................................................................................... 117

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Farm Management
Introduction

The meaning and importance of Farm Management

One of the most striking things that have emerged out from Farm Management surveys is the wide
variation of farm incomes among any group of farms. No doubt some of these variations can be
explained by such factors as:
1. Climate
2. Soil fertility
3. Size
4. Type of enterprises etc.
But even after these factors are taken account of, there still remains a wide variation in farm incomes.
This variation, which cannot be explained by climate, soil, etc., may be regarded as that due to the
“farm management” factor.

Farm Management may be described as the art and Science of organizing and operating a farm business.
There are two aspects of Farm Management: -
1. The technical aspect, i.e. the knowledge of the scientific principles and practical
skills of crop and livestock production. This knowledge is gained through education
and through practical experience in operating the farm.
2. Business aspect: knowledge and application of business principles in farming.
Though not ignoring completely the first aspect of farm management, this course
concentrates mainly on the second part. A farmer or farm manager may have many
objectives in operating his farm business. But for ease of discussion of Farm
Management principles, an assumption is made that the farmer wishes to maximize
net revenue (profit) from the farm. Farm Management is a decision – making process.
Broadly, the farm manager selects from a range of alternative farming techniques and
systems that technique and system which will maximize his long run satisfaction,
profit.

The farm manager has to make decisions on:

1. What to Produce?: There is a wide range of products that a farmer or farm manager
can produce within the limits of technical, economic and physical factors. The farm
manager has to decide which ones to produce to maximize his goal. Examples.
2. How to produce?: Again an infinite range of production technique exists for the
production of any commodity a farmer may select. eg
i) Hand versus machine – milking
ii) Hand versus machine - cultivation, Grazing versus stall feeding of cattle
iii) Irrigation versus dry land farming
iv) Intensive - extensive etc.
The criteria are to use the technique that will maximize the desired goal (profit).
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3. How much to produce?. I.e. the scale of operation. In order to maximize profit,
factors must be combined in such away as to minimize profit. At least the same time,
the condition MR=MC should be fulfilled for each factor.
4. When to produce? Determined by the season and the time the market is available
5. For whom to produce? This refers to the market available. Production cannot take
place unless the produce has the market

Importance of Farm Management

Under conditions of subsistence farming, the problem is to ensure adequate food and cash supply for the
family’s subsistence needs. Here mere technical knowledge of how to produce livestock and crop
products may be adequate. As farming becomes more and more commercialized, objectives change.
PROFIT becomes the major objectives of the farmer. The farmer starts striving to minimize costs and
maximize revenue in order to attain the goal of maximum profit. At this stage, the knowledge of
business principles of Farm Management becomes very important for efficient farming only possible
with the application of business Farm Management principles.

1. Scarcity of Resources
a. Land
b. Labour
c. Capital

Are all-scarce. Unless these resources are used efficiently, the farm
manager may be unable to achieve his goal with the limited resources.

2. Aspirations for a higher standard of living. Many farmers and farm manager
expect and desire to continually raise their standards of living. This only occurs if
available resources are efficiently used so that they yield the highest possible net
return.

The major functions of Farm Management

For the sake of ease of presentation, five major functions are recognized here.
1. Acquiring knowledge or information relevant to the farm business. Information
may be acquired from many sources including:- Radio, Magazines and other forms of
mass media. Newspapers and magazines will often contain some information useful
to the farmer – e.g. price trends, techniques of raising a crop successfully etc. So
would radio and television: there may be talks on control of coffee berry disease etc.
Farming magazines – e.g. Kenya Farmer would contain even more comprehensive
information. Extension advisors: will normally offer general information on how to
raise better crop livestock etc. and likely results of implementing their advice. They
may also advise on price trends etc. Usually too general. Research Stations: These
will normally be producing useful production data, which the farmers may get
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directly or may receive through the extension service. Such data may not be directly
or may receive through the extension service. Such data may not be directly
applicable, however. Farmer’s own experience and particularly his farm records.
Accurate records of the particular farm provide the most reliable information and also
the most useful.
2. Decision making and Analysis of the knowledge or information acquired to yield
productions of likely outcome of possible alternative courses of action e.g.
information on prices and yield estimates of income to be expected from given crop
acreage, livestock numbers etc. Predictions of likely outcome are essentials in
decision-making.
3. Setting of objectives for the firm.
4. Fore casting
5. Formulation of plan:
On the basis of predictions in 2 above, a decision is taken to pursue certain
courses of action. The decisions made on the basis of results of analysis of the
information available and informed decisions – they are based on established
knowledge of the relative profitability of various enterprises; the farmer may draw
up a plan as follows:
Enterprise Acreage Income

Maize 4 4 x 15 x 20 = 1,200/=
Dairy (5 cows) 10 5 x 500 1/50 = 3,750/=
Potatoes 6 6 x 50 x 15 = 4,500/=
9,450/=
6. Implementation of the Plan (planning). i.e. taking the necessary action to see that
the plan is put into action e.g. for the plan above, the farmer would:-
a. Plough the land and plant 4 acres of maize and 6 acres of potatoes.
b. Purchases 5 head of dairy cattle and ensure that the 10 acres of grazing
is available.
c. Perform the day-to-day routine to ensure results anticipated are
realized etc.
d. Taking the responsibility or bearing the consequences of the plan.
e. In as far as it is impossible to obtain perfect information on any aspect
of agricultural production due to the many variables outside farmers
control, the farmer or manager can never be quite sure that his
expectations will be realized.
f. Should the Predictions be right and profit is realized, the farm
manager’s efforts will be rewarded. Whatever the outcome, the
manager takes the responsibility. To the extent that losses could be
incurred, the decision taken involves risk. The manager therefore
hears the risk of his decisions.
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7. Controlling (evaluation)

Qualities of a Good Farm Manager

1) He makes informed decisions and therefore he is a profitable (rational) decision
maker.
2) He knows when to call the experts, delegate duties, when to advice etc.
3) Effectively carries his plan in good time.
4) Realistically plans his farm operations in view of his ability, experience and the
resources available.
5) He should aim at achieving better than average yields at a lower production cost,
good quality and hence aim at maximizing profit.
6) He should be innovative in nature with reasonable risk bearing capacity.
7) He should attempt to improve his agronomic knowledge through reading, practicing,
contacts, research etc.

NB/ Disorganized farmer or farm manager will do the reverse/ opposite of the above.

Factors Affecting Managerial Effectiveness

1. Experience: This will depend on personal background. Those who have traveled and
have experienced more will have more knowledge generally and have4 a wider
outlook and higher ambitions than those who have spent most of their time in their
own farms or society and therefore they may not conform to the modern farming as
well as any other change in production. They tend to be rigid and slow in accepting
new ideas and therefore they are not innovative.
2. Education and training: Generally qualified managers and educated ones have
flexible minds to make the best use of the new methods of farming. Therefore they
usually make use of advisory services and management consultants and adopt the
available advice that is suitable to their conditions. The farm manager must keep on
educating himself as well as going for higher trainings.
3. Personal characteristics: Certain qualities seem to be very common in most
successful farm managers. They include the following:
a) Willingness to work
b) Courage to innovate, invest but with minimum risk bearing capacity
c) Self confidence and will power
d) Honesty - let what you promise be done
e) Ability to inspire, to get on with the people or control the people
f) Ability to try again when you have failed earlier
g) Of good health

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4. Age: The manager’s age usually influence his effectiveness. Most of the people go
through three phase cycles, but length of each phase varies differently. The phases
include:
a) Learning phase
b) Maturity and top performance phase (between 45years and 54 years of
age)
c) Post maturity phase
d) Old individuals have more experience but their objectives usually
change and may result to stress on individual, this means that the old
managers are incapable of being innovative because of their out dated
knowledge.
e) Young managers especially those of growing families have the
greatest desire to maximize the income. They tend to be more
progressive and innovative. However they find it difficult in leading
the old staffs who may have no respect to the young managers.
5. Development of managerial skills: Certain important managerial skill can be
developed by experience, training. The most important include: observation,
analytical ability, decision-making ability, implementation ability, communication
skills etc.

How to Improve Managerial Skills

1. Education and training of managers /farmers
2. By improving literacy by reading magazines e.g. news papers, farmers’ magazines
3. Through demonstration i.e. organizing some meetings for the farmers and managers
and attend to them in general by attending field days, agricultural shows etc.
4. Contact with others –this is contact with NGOs dealing with agricultural production,
field agricultural officers, research institutes etc.
5. Owner experience especially when using your own farm records and accounts.

6. Carrying out operations on time-It should be done bearing in mind ones ability and
scarcity of resources.
7. Attending seminars, tours, FTC courses and touring one place to another. Attending
all agricultural activities.
8. Research in useful aspects of farm business and practical simplification of
information and passing them to the farmers

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The farming system and farm enterprises

Farming as a Business Versus Subsistence Farming
1. It has already been stated that for the peasant farmer, the concern is adequate food
supplies for his family and a sufficient surplus for sale to meet his family’s cash
needs. Once this has been achieved, there is no concern over optimizing efficiency of
resource uses, or maximizing profit. In this case technical knowledge of growing
crops or raising livestock would be largely adequate as far as the farmer is concerned.
Accurate information on the outcome of alternative courses of action is not essential.
2. However, when farming is viewed as a business, possession of mere technical
knowledge is not enough.
a. A clear definition of one’s goals is necessary.
b. Planning for efficient resource utilization to maximize the goals is also
essential.
c. The budget has to be based on accurate information, which can be
obtained through proper and accurate farm records.
3. In this case, i.e. business, it is essential to know the basic business principles and to
apply them, in addition to any technical knowledge on actual crop and livestock
production.
In our discussion of the farming system, we should bear this in mind since the
type of system recommended should be in agreement with the farmer’s
outlook, commercial or subsistence.

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Selecting the Farm Enterprises

The farming system, i.e. the type and combination of farm enterprises, is determined by great many
factors. It is necessary for a farm adviser to be aware of these factors when advising a farm to
“improve” his farming system.

The important factors considered in the selection of farm enterprises may be broadly classified
into four categories:-
1) Physical Environmental Factors eg weather, soil type, topography
2) Social and cultural Factors
3) Legislative Factors (Legal factors)
4) Economic Factors

1. Physical Environmental Factors: These are the factors that determine the actual
production possibilities from which the farmer may choose those that will operate.
These factors include: -
a) Climate e.g. rainfall, temperature, hailstones etc.
b) Soil – depth, texture drainage, natural fertility, Ph (acidity) etc.
c) Topography: attitude (which affect climate) slope of land, lay of the
land (e.g. weather flat, gently sloping or rolling) etc.
d) Presence or otherwise of pests, diseases etc.
All these factors will influence the farming systems because different
enterprises will only do well under certain Climatic conditions –
a) Rainfall, temperature etc.
b) Soil conditions acid, depth, fertility etc.
c) Conditions in which certain disease and pests do not exist, etc.
d) Topography can strongly influence such factors as - cost of using
machinery – accessibility from market centers, type of crop preventing
erosion or otherwise.
NB/ It is noticeable, however, man may modify some of these factors,
e.g.

i. Irrigation to counter lack of natural rainfall,

ii. Use of chemicals,
iii. Fertilizers to raise fertility ,
iv. Pesticides to counter posts etc.
v. Breeding varieties that will be adapted to certain
conditions.

2. Social Factors. These factors influence farmer’s preference in his choice of farm
enterprises, given the physical legal and economic factors.
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a) Religion.- Muslims who do not eat pigs will hardly keep pigs. Hindus who do not eat
beef are very unlikely to keep beef cattle.
b) Traditions. People who still value their traditional customs more than income will
hardly select enterprises on basis of profitability - e.g. Maasais find it difficult to
change from nomadic to sedentary life, i.e. from livestock keeping to cultivation.
3. Legal factors. This is related to restricted or prohibited crops.
a) Quotas: - Some crops can only be sold if a quota exists for them, e.g.
pyrethrum in Kenya. Milk also used to have a quota system, but this
could still be sold locally for home consumption.
b) Legal prohibition: In Kenya, no new acreage of coffee should be
planted, according to law. In some countries including Kenya, Opium
is illegal to grow. Yet, Economically, opium is probably the most
profitable crop known.
4. Economic Factors: These factors vary irregularly over time and determine the final
choice of enterprises from the possibilities available as determined by the physical,
social and legal factors.

Other factors determining choice of an enterprise

1. Objectives of the farmer: There are many possible objectives that farmers may wish
to fulfill by farming. These include:
i. Profit
ii. Subsistence
iii. Hobby etc.
Whatever the objectives, it will influence the final choice and combination
of farm enterprises. An individual farming as a hobby will select those
enterprises most attractive to him or her.
A farmer interested in subsistence will be interested in food crops and
livestock enterprises providing food on a fairly certain basis. A farmer
interested in maximizing profits will pick those enterprises, which in
combination will be the most profitable.
2. Availability and Reliability of Markets: It is no use producing a product, which
there is no market if profit is the goal. Many people tend to produce first and look for
a market might exist but not at a price profitable to the farmer. Eg Kericho farmer
planning to keep pigs for upland bacon market but ignores marketing costs due to
transportation. It is important in considering the market to consider.
a) Whether the product does have a demand or a demand can be created.
b) At what price is the demand likely to match the supply?
c) The nature of demand – whether regular, cyclical etc.
d) Marketing costs versus market price: The importance of the market is
emphasized by the fact in Kenya today; no new acreage may be
planted although a lot of land is suitable for coffee. Reason –
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International coffee quota, which restricts the market. Note the market
for milk:
i. Very little milk - liquid milk market with very high
prices
ii. Much milk but not enough to justify factory but more
than liquid milk market will absorb – very low prices.
iii. Large quantities justifying factory
3. Transportation: Complete lack of transportation may preclude all forms of
production. However, the important aspects of transportation in practice are: -
a) Efficiency of transportation system to terms of speed and reliability.
This will particularly affect the production of perishable commodities
e.g. market gardening is largely dependant on efficient transportation.
Sales of fresh fruits and vegetables and even dairy products from East
Africa to the European markets is hampered by lack of adequate and
efficient transportation facilities.
b) Cost of transportation - relate to efficiency. Sometimes
transportation may be available but too expensive e.g. the greatest
hindrance to sale of E.A horticultural and dairy products to the
European Markets is not so much is absolute lack of transportation
but the costs of available transportation. Most fruits and vegetables
are bulky and perishable and this explains why market gardening is
centered around the main towns – Nairobi, Kampala etc. Waste due to
inefficient transportation is thus minimized. Transportation costs for
products with a low value per unit weight are also minimized.
4. Availability of capital: This particularly important when one is starting a new farm
or making a major reorganization of the farm. Some enterprises require more capital
than others – e.g. arable cultivation requires less capital than starting a poultry or a
pig enterprise, potatoes require less than maize or wheat etc. Enterprises will also
require different gestation periods e.g. beef takes longer than dairy to yield a return
while annual crops take shorter than perennial crops (e.g. maize versus coffee) etc.
a) Requires relatively little initial capital e.g. potatoes rather than
dairy cattle.
b) Returns will be realized quickly – e.g. dairy cattle rather than
coffee.

5. Availability, quality and cost of factors of production: For any profitable operation
of any enterprise, it is necessary that all factors of production be available in the right
quantities, in the right quality and at the right price.
a) Labour: - Many enterprises require a high labour input
particularly at harvesting – e.g. cotton, pyrethrum, potatoes. If labour is
not available in the right quantities from the family, labour should be
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available for hire at reasonable wage rates. Labour could be available

but at too high rates. In dairying, market gardening, and tobacco
production, the quality of Labour is essential. Labour must be skilled
in various operations, otherwise success may not materialize.:
b) Seeds/Planting materials etc.: At one stage, expansion of tea in
Kenya was seriously hampered by lack of planting materials – i.e
farmers who had chosen tea as one of their enterprises could not
introduce it when they wanted. Pyrethrum is another enterprise for
which good quality planting material is often lacking. Hybrid maize
has also been scarce at some stage.
c) Cattle for establishing a beef or a dairy enterprise. In many
parts of this country, grade dairy cattle are lacking – e.g. many parts of
Nyanza Province. Farmers wishing to introduce good quality dairy
cattle cannot obtain the cows. In some cases, where some cows are
available the price may be too high. With beef cattle, purchasing in of
young stock is more profitable than maintaining a breeding herd.
However, young stock for purchasing is often very scarce.
d) Fertilizers, pesticides, veterinary drugs: their price and
availability will also influence their use, where an enterprise cannot do
well without these inputs, its success will seriously be jeopardized by
lack of these chemicals or too high prices, and the enterprise in question
may be left out.
Before a farmer can accept a particular enterprise, he will no doubt
examine the availability, quality and cost of the input necessary for the
enterprise and only select the enterprise when he is convinced he can
obtain adequate quantiti4es of the right quality at a reasonable price all
the inputs he needs (like the hybrid maize example).
6. Risk and uncertainty: In Agricultural production, farmers have to face many
variables, which are outside their control. Such are changes in the weather, outbreaks
of pests and diseases, fluctuations of prices etc. since the farmer cannot control such
variables, he cannot be certain of future events or outcomes; if anything he can only
predict them.

a) Uncertainty is the state of not knowing about future events or

outcomes. In other words uncertainty is the imperfect knowledge about
future events.
b) Risk This is the difference between what a farmer could predict and
the actual outcome. In other words, risk is the divergence between the
expected and the actual outcome.

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Types of risks and uncertainties

1) Price risks : Price of agricultural produce keep on changing
2) Production risk: Physical yield uncertainty: The farmer does not know how much he
should expect. Out break of pests and diseases: This will affect the expected outcome.
New production technique uncertainty: The farmer may not be certain as to whether
new technology is as effective as the one he is used to. Weather changes: Things like
floods, drought, storms, strong wind etc. may destroy crops or kill animals.
3) Financial risk. Obsolescence: A farmer may invest in machinery, which may
become out dated (obsolete) within a short time. On the other hand, he may invest in
a crop that soon loses the market.
4) Government policy: The government may prohibit production of a crop or animals,
which is already on. Change in government policy may affect production
5) Risk caused by individuals : Sickness and injury uncertainty: This is where the
farmer or a member of the family or employee is affected and loses the ability to
work due to sickness or injury. Theft, association with other business or institution
such as banks, business partners, clan etc.
6) Others: Wars, Earthquakes, These may affect agricultural productivity and
marketing.

Methods of reducing risks and uncertainties (ways in which farmers adjust to uncertainties)
Different farmers have different attitudes to risk and uncertainty. For instance, some farmers are
adventurous while others are conservative and do not want to take chances. They also have varying
capacities to bear risks. Those with a lot of production resources at their disposal have a higher capacity
to bear risks than those with limited resources. Depending on his ability to bear risk, any farmers will
adjust his production plan to accommodate it. These adjustments are designed to reduce the degree of
uncertainty or to increase his ability to bear it. The following are some of the common measures that a
farmer may adopt:
1) Diversification: This involves setting up several and different enterprises on the farm
so that should one fail, the farmer does not suffer a total loss. The enterprise failure
could be due to a disease outbreak, drought, poor market prices etc.
2) Insurance: Insurance companies take the risk of insuring farm machinery, crops and
livestock against loss. Farmers pay small amounts of money (premiums) as insurance
cover to the insurance companies. The cover guarantees them compensation in the
vent of a loss. It covers losses due to crop failure, death of livestock, theft, fire,
accidents involving farm machinery etc.
3) Price contract: Farmers may enter into a contract with consumers to supply certain
goods over a specified period of time at an agreed price. Such a contract guarantees
them a constant, fixed market for their produce. It has some disadvantages in that,
should market prices rise, the farmers would not benefit. At the same time, they
receive lower incomes in the long run due to the fact that contract prices are usually
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lower than the average market price. On the other hand, should prices fall, the farmer
gain and this is a big advantage.
4) Flexibility in production methods: Farmers may design their enterprises such that,
should there be a need to change from one enterprise to another in response to a
change in demand, they can easily do so with minimum expenses. For example,
livestock buildings should be constructed in such a way that they can, with minimum
modification, be used to house different types of livestock.
5) Guaranteed minimum returns (GMR) scheme: This is selecting more certain
enterprises. Some enterprises have a more steady income over time than others; eg
maize enterprise has a less variation in income than an Irish potato one. Under
conditions of uncertainty, the farmer would be better off if he chose an enterprise that
would earn him a more steady income though less profitable.
6) Input rationing: Farmers control the quantities of inputs used in various enterprises.
They may apply less inputs than the optimum required for an enterprise so that,
should unfavourable conditions lower yields, or prices fall, they suffer less loss than
if they had used the optimum amount of inputs. They can also use additional inputs in
enterprises that have better chances of giving higher yields.
7) Adopting modern methods of production: This can be used to reduce the degree of
risk. For instance, spraying crops against diseases and pests, vaccinating
livestock against diseases, irrigation etc can enhance the chances of high production.
Adopting these modern methods involves an extra cost. Nevertheless, by incurring
them, they avoid the would be losses. Some enterprises are more risky than others e.g.
poultry more risky than dairy – due to the high disease incidence. Also farmers have
different risk-bearing capacities.Farmers with a low risk-bearing capacity or who are
less, adventurous will leave out enterprises with a high risk element and select those
which are more certain even though the farmer may be more profitable than the later.
8) Relative profitability of the enterprises: Profitability is the ultimate measure of the
relative worth of one enterprise compared to another. Given that all other factors are
favourable, the farmer should, in general maximize enterprises in order of their
profitability until resources are used up.
9) Enterprise relationship: Enterprise relationships are very important in selection and
combination of farm enterprises. Recall:-
a) Joint Products - e.g. Lamb and wool, cotton Lint and cotton seed.
Here the farmer has no choice. Choice of cotton lint determines
cottonseed.
b) Competitive Products: - e.g. Wheat and maize – if two products
compete in such way that MRS is constant, then the product only
should be Selected on basis of profitability. If MRS decreases at an
increasing rate, combination of the two may lead to higher profit than
when only one is produced, e.g. crop and livestock enterprises.

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c) Supplementary Products: If both have a price, it pays to push the two

products up to a point where they are just competitive – e.g. poultry &
Grains no effect on the other enterprise.
d) Complementary Products: e.g. Grains and legumes more profitable
to produce both to the point where they become competitive. Increase
in one causes an increase in the other. If the farmer is interested in
maximizing profit for a given level of resources, then, he will select a
combination of enterprises, which will help him achieve maximum
profit. Where production possibilities are such that products are
always competitive, it is possible that specialization may be more
profitable than specialization. In particular, where one enterprise
individually tends to have market peak labour demand, and several
enterprises together tend to even out the total farm labour demands,
then combination of such enterprises may increase farm profits.(Soil
fertility maintenance)
Rotation considerations also come under enterprise relationships.
If rotation is to be effective enterprises, should as far as possible
have complementary or supplementary relationships e.g. Grass
leys (Dairy etc) with crops legumes and grains.
The ultimate combination however, should be that which will yield
the maximum possible profit.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Farm Planning
The Need for Planning
1) Planning involves establishing a set of goals and clearly defining the means of
achieving them. Since the farmer’s goal is, in the context of this course, maximum
profit, the farmer would be expected to set for himself production targets for these
products he has decided to produce, and to draw up a programme of resource use to
ensure the attainment of maximum profit.
2) It has already been stated that resources are limited. If resources are used in a
haphazard manner, it is unlikely that profit will be maximized. It is even likely that
losses will be incurred. Hence the need for planning to ensure optimum resource
utilization for attainment of maximum profits. In operational terms, planning helps
the farm manager to
a) Clearly define his goal or goals and the means of attaining them.
b) Continually assess his progress towards his goals.
c) Discover the main reasons for either success of failure to achieve
his goals.
d) Review his programme in the light of factors contributing to
successes or failures, and to read just his plan to eliminate the
weakness while capitalizing on successes e.g. a farmer may have
the following plan:-

Enterprise Acreage Estimated Income

Yield

Maize 41 15 bags/at 20/= 1,200/=

Dairy Cows (5) 10 500 galls/cow @1/50 3,750/=
Potatoes 6 50 bags/at & 15/= 4,500/=
----------
9,450/=
He may have a corresponding set of expenses such that this plan gives the farmer maximum profit.
He may however discover that owing to incremental weather, maize yields are only 10 bags/acre while
Dairy cattle average 520 gallons/cow. To move towards the same goal, the plan should be adjusted in
the following cropping season to reduce or even eliminate maize and expand dairying or potatoes.
It will therefore be seen that only with proper planning can one be certain of attaining maximum profit.
Proper planning in turn depends on sound information. Accurate and reliable planning information is
only obtained if the farmer keeps accurate records of all his activities. Hence the need of farm records.
The need and types of records to keep will be discussed in the farm accounts course. Hence, it is
sufficient to state that in this course, we shall assume that proper farm planning is done, and this is
always based on accurate records.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Steps Involved in Farm Planning

The following steps may be used in the farm planning process:
1) Collection and analysis of information relating to environmental conditions in order
to establish all the environmental possibilities. The information needed should be on
such aspects as the amount and distribution of rainfall, Soil capability. Transportation
facilities. Availability of markets for both the input &output. This step involves
determination of the environmental conditions by collecting information on climate,
soil and vegetation, and analysing the data in order to establish all the feasible
enterprises.
2) Determine the farmer’s (farm manager ) preference and objective in order to
eliminate those production possibilities that are not desired .This involves getting to
know what the farmer or the farm manager want to produce and at what level of
production.
3) Set out a list of all resources available in order to establish the farm manager’s
abilities and limitations which include. Size of the farm (Determine the farm size by
surveying and calculating out the acreage.) Availability of all forms of capital.
Availability of all forms of labour. Availability of management
4) Develop tentative schedule that involves listing the types of the enterprises and
stating out the types and cost of the physical resources required. This should lead to
selection of one enterprise or a combination of enterprises or a selection of enterprises
and a farm layout.
5) Draw a tentative plan. This involves listing all the enterprises selected and for each
enterprise state the type and quality of resources required, the type, quality and
quantity of resources required, the type, quality and quantity of product anticipated.
6) Calculate the return in gross margin per unit acre. I.e. determine the expected yields
and returns of the various enterprises and give a list of priorities.
7) Determine the technical feasibility of the plan to ensure that the resources
requirements can be made from the farmers available resources in terms of the
availability of extra labour in case of an additional labour requirement, the
availability of capital requirement with farmer’s ability, the managerial ability to take
care of the plan he/she should not violate any sort of legal requirements. The
feasibility makes the plan to be realistic; it also involves taking into consideration
external influences such as government policy and regulations. The yields and total
output estimates of various products involved must be checked to ensure that they are
realistic.
8) Implement the plan and make a follow up (Examine and analyse the plan to ensure
that it is consistent, workable and desirable). In implementation, there is financial
involvement, which is assessed as expenditure income. The plan in form of
expenditure and income is also referred to as a budget. A budget translates the
physical plan into monetary value. This also involves developing a financial flow in
order to establish the capital requirements.
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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

9) Observe and evaluate the planning in the course of implementation

Farm System Analysis

A farming system is the way individual farm enterprises are organised and how they fit together in an
overall farm unit. A farm unit identifies the use of resources to achieve the set objectives. When a farmer
carries this out, he should look into the enterprises to see how they compete with each other,
complement each other in the use of scarce resources.

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 reorganization of the farm business. Hence a farm plan may be termed a
scheme for the operation and organization of the farm business.

What is the Need for Planning?

1. Planning serves as a guide to show what the manager or farm operator intends to produce,
how much to produce and method of producing. Basically, it enables one to choose
from among alternatives.
2. Planning shows the weakness that might be existing in the present management of the
farm business. It leads to exploiting those areas that might be contributing to the farm
income.
3. Through planning, one can be in a position of developing a rotation programme and them
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 the open
opportunities of reaching desired goals.
6. A farm plan should be availability for a farm to acquire credit.
7. From the above hints it can be seen that a farm plan plays a vital role in the whole
operation and organization of the farm business. It is up to the decision maker to see
what kind of plan to effect in his farm. Planning in the case of large-scale farms
involves the use of a strict budget.

NB/ When planning one has to realize that resources are scarce and, therefore, a number
of alternatives have to be weighed only to come out with one that yields the greatest
economic goals. When planning both the technical and aspect here to be borne in mind
as they all go together and greatly influence the ultimate returns.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Factors to consider when planning:

A number of factors need consideration when planning, such factors include the following:
1. Land capabilities for different enterprise, not all land is the same in respect of
fertility PH, drainage, topography, water retention etc. Therefore, one has to find out
what is actually suited to his land.
2. Labour – The situation of labour need attention as it will influence the
Implementation of the plan. Both availability and quality of labour.
3. Marketing - The marketing arrangements of the products to be produced must be
looked into. Not only the output as such but also the availability of the many inputs
required in the production process. This will decide on how well the inputs will be
obtained and also the products will be marketed.
4. Environment: This includes a wide range of things such as rainfall, sunshine, wind,
soil, etc. This does not need to be overemphasized, as its effects 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 inputs shall be brought to the farm and the products sent
for marketing will depend
7. Price of input and outputs: Input and output prices are very important as regards
farm plan. The aim in farming is to maximize all the profits and therefore the cost of
the inputs must be such that the profits are realized. The aim is actually to know how
much a product produced will meet the cost of production (break even principles). In
other words the farm manager must clearly realize how much a liter of milk, akg of
meat, a bag of maize, a bag of wheat will cost you/ him to produce. Therefore he will
be in a position to know what amount of price he will offer the products at.
8. The risks: In farming the risks are usually involved. They may come out as a result
of pests, diseases, crop failure etc. The weather mainly brings these risks. However
some enterprises have more risk than others during production. This has got to be
well looked into when planning.
9. Flexibility: Plans do not have to be all that rigid as the owner of the farm or farm
manager might decide to change from one enterprise to another. The farm buildings
must be in such a way that they allow some amount of flexibility.
10. Specialization and diversification: When making a plan it is important to know
whether you should go into specialization e.g. operation in livestock only or to move
into diversification where a wide host of the enterprises are involved. Whichever to
take, it involves a risky managerial ability, resources that are available etc.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Planning Techniques and Requirements

The first requirement for efficient management is availability of inputs and output data capable of
measurement and analysis. This is possible only if systematic farm record keeping both physical and
financial records of production activities is adopted by the farmers, who intend to be efficient. In Kenya
such records are rarely kept by most of the farmers, which makes it difficult to formulate performance
by measuring of analysis and comparison. Lack of relevant data complicates the work of farm
management advisors when advising farmers on optimum combination of resources and enterprises.
Farm records are particularly useful in farm planning and their availability will make it relative easy to
use effective planning techniques.
Good farm plan will help the farmer to:
1) Define both their objectives and the means of attaining them.
2) Used to assess continuously the farmer’s progress towards attaining the objectives
while discovering the main reasons for failure or success. This means adjusting the
farming programmes according to the factors contributing to different levels of
productivity.
NB/ This implies that every farmer needs to have a farm plan, showing how the farm
resources are allocated. This is true for both subsistence farmers and large-scale farmers
Farm business studies have in the past consecrated on farm accounts, farm organisation
and the enterprise cost. With the view of helping the farmers to identify the problem of
adjustment and associated factors to offer reasonable solution. Farm planning often used
are:
a) Budgeting
b) Gross margin analysis
c) Programme planning
d) Linear programming and other sophisticated planning techniques
which are being introduced now and then and the aim is profit
maximization.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Budgeting as a Method in Planning

Budgeting is the translation of the physical plan into financial terms i.e. expenditure and receipts.
Therefore it involves the multiplication of the price and quantities of output and quantities of input and
their prices must be justified to be realistic. There are various types of budgets including:
1) Complete budget
2) Partial budget
3) Break even budget
4) Gross margin budget
5) Enterprise budget
6) Cash flow budget
7) Capital budget
Complete Farm Budget (Whole Farm Budget) or Complete Budget
A complete budget is a sort of statements which sets out the probable total cost and probable total
returns of the whole farm business. When is it used? :
1) When a major reorganisation of the farm (e.g. changing from maize to dairy farming)
is to be made a complete budget involving the whole farm is the most important
planning technique.
2) When a programme for a new farm is being planned e.g. a mismanaged farm is being
rehabilitated e.g. rehabilitating ADC farms a complete budget needs to be prepared.
3) When the extension agents are drawing up a plan for a new entrant to farming or a
farmer who takes a new farm e.g. In case where AFC is auctioning loan defaulters
then a new farmer needs to draw up a complete budget.

Factors to be Considered When Drawing up a Complete Farm Budget

1. Formulating goal, aim and objective of the farmer and his preference e.g. if he prefers
maize production to potato production. Here the farmer states the reasons for setting
up the farming business
2. The farmer ability to carry out the plan e.g. expertise required
3. The resources available to run the business e.g. land
4. The natural and physical environment eg weather condition, soil type etc.
5. The area of land and different types of conditions of such lands, capital availability,
labour availability etc.

To ensure that the above factors are attained the following steps or guidelines are followed:
1. Formulation of farming goals
2. Taking the farm inventory. The items listed in the inventory should include: farm
buildings land improvements breeding stock, human labour, funds available,
sources of power, machinery and equipment etc.
3. Planning for resources e.g. how land, labour &capital are utilised
4. Estimating production
5. Estimating income and expenditure i.e. by estimating prices and cost.
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6. Analysing the input- output relationship that exist on the farm

7. Analysing the existing production weaknesses
8. Making a number of alternative farm plan and one for adoption.
9. Putting the best plan into operation
10. Supervising the implementation

Advantages of Planning and Budgeting

Helps the farmer to estimate the future profitability and capital requirement for the purpose of obtaining
credit
1) It can help the farmer when he want to submit a tender for a farm tenancy or sale or
any other purpose
2) It helps the farmer when he want to plan for future tax commitments
3) It helps the farmer when he wants to set up and operate a budgetary control.
4) It assist the farmer when negotiating for farm credit
5) It pin points efficiency or weakness in the farm operations
6) It ensures a periodic analysis of the farm
7) It instils into the farmers and farm managers the habit of timely, careful and adequate
consideration of all factors that are involved in a farm business before making
management decisions
8) It tends to remove the cloud of uncertainty that exist in many farms among the lower
levels of management with regard to basic policies and objectives
9) It shows progress or lack of it towards the set objectives

FORMAT OF A COMPLETE FARM BUDGET

TITLE: EG A COMPLETE FARM BUDGET ON MR. OKECH’S FARM IN NAROK
DIVISION
EXPENSES AMOUNT GROSS OUTPUT (REVENUE) AMOUNT
(COSTS)
SH CT
SH CT
VARIABLE --------------- ----- GROSS OUTPUT (TOTAL ------------ -----
COSTS (TVC) REVENUE (TR))

FIXED COST --------------- ---

(TFC)

TOTAL COST ---------------- --

(TVC +TFC))
FARM NET INCOME = TOTAL REVENUE - TOTAL COST = ==============

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

EXAMPLE 1:
Mrs Abuya a farmer in Meru owns 80 Ha. of grassland. Where she keeps 40 cows. The total output for
the cows is 960litres of milk per Ha. Price of milk is expected to be sh20 per litre .The labour
requirement is 20 man-days per Ha. and the cost of each man-day is sh 50. The farmer and her family is
providing an additional 800 man-days per year at the same assumed cost. The overhead cost (fixed
cost) of the farmer are as follows: permanent fence ksh10, 000, dairy shed ksh6, 000, dairy equipment
sh4, 000, depreciation cost for machines ksh2, 800, interest rate ksh10, 000. prepare mrs Abuya’s
complete farm budget.

A COMPLETE BUDGET ON MRS ABUYA’S DAIRY FARM IN MERU

EXPENSES (COST) AMOUNT GROSS OUT PUT AMOUNT

(REVENUE)
SH CTS SH CTS
VARIABLE COSTS MILK: 960 litres/ Ha. X 80 1,536,000
Ha. X sh 20
Labour: 20 man-days per 80,000 00 TOTAL REVENUE (TR) 1,536,000 00
Ha. X 80Ha.X sh50
Family labour : 800 man- 40,000 00
days X sh50
TOTAL VARIABLE 120,000 00
COST (TVC)
FIXED COSTS
Permanent fence 10,000 00
Dairy shed 6,000 00
Dairy equipment 4,000 00
Depreciation 2,800 00
Interest 10,000 00
TOTAL FIXED COST 32,800 00
(TFC)

TOTAL COST (T.C) = 152,800 00

TVC +TFC)
FARM NET INCOME =TOTAL REVENUE –TOTAL COST= 1,536,000-152,800= 1,383,200.00

CONCLUSION: The farmer should implement the budget because he will make An estimated
farm profit (or farm net income) of sh1,383,200
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Example 2:
Mr. Koech a farmer in Kitale has got 20 hectares of land which he
Wants to plant and keep livestock.
Maize 10 ha.
Sunflower 3 ha.
Groundnuts 2 ha.
Dairy animals 2.5 ha.
Irish Potatoes 2.5 ha.
The output and prices of the production are as follows: -
maize gross output 30 bags/ha. at a price of 1300/per bag.Sunflower gross output 30 bags/ha at a price of
sh. 3,000 per bag.
Groundnuts gross output 20 bags/ha. at a price of sh. 3,200 per bag.
Dairy animals gross output 3,000 litres/ha. @ sh. 20 per litre.
Irish potatoes gross output 70 bags per ha. at sh. 700 per bag.
The farmer has got the following information: -
cost of land preparation – sh. 6,000 per ha. This includes primary and secondary tillage.
He expects to buy 60 bags of fertilizer at a cost of sh. 1700/bag.
Weeding - 20 man days per Ha. @ sh. 200 per man day.
Harvesting - 50 man days @ sh. 40 per man day.
Transportation cost to be sh. 3000
Storage expenses to be sh. 500
Interest to be paid sh. 1,500 during the season.
Insurance fee sh. 3,000
Animal feeds sh. 20,000
Veterinary services sh. 4,000
Seeds
3 bags of sunflower @ sh. 1,000 per bag.
1/2 bag of groundnuts @ sh. 4,000 per bag
50 bags of maize seeds @ sh. 4,000 per bag
3 bags of potatoes @ sh 2,000 per bag
Cost of management sh.30,000 miscellaneous sh10, 000 prepare a complete farm budget and determine
whether it is profitable to implement the farm budget..

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 NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

A COMPLETE BUDGET ON MR.KOECH’S FARM AT KITALE

EXPENSES (COST) AMOUNT REVENUE (OUTPUT) AMOUNT
SH CTS SH CTS
VARIABLE COST
Land preparation 105,000 00 MAIZE: 390,000 00
6000Ha. X cultivated land 30 bags per Ha.X 10 Ha. X
(17.5Ha.) sh1300
Fertilizer 60 bags @ sh1700 102,000 00 SUNFLOWER: 270,000 00
per bag 30 bags per Ha. X 3Ha. X
sh3000
Weeding20 man-days per Ha. 70,000 00 GROUNDNUTS: 128,000 00
@ Sh200 (20 X 200 X 17.5 20bags per Ha. X 2Ha. X
Ha.) sh3200
Harvesting (50 man-days x 2,000 00 MILK: 150,000 00
sh40) 3000 Litres per Ha. X 2.5
Ha. X sh20
Transport cost 3,000 00 IRISH POTATOES: 122,500 00
70 bags per Ha. X 2.5 Ha. X
sh700
Storage expenses 500 00 TOTAL REVENUE (TR) 1,060,500 00
Animal feeds 20,000 00
Sunflower seeds (3 bags X 3,000 00
1000)
Ground nuts seeds (1/2 X 2,000 00
sh4000)
Maize seeds 50 bags @ 4,000 200,000 00
Potato seeds (3 bags X 2,000) 6,000 00
Veterinary services 4,000 00
Miscellaneous expenses 10,000 00
TOTAL VARIABLE COST 527,500 00
(TVC)
FIXED COSTS
Management costs 30,000 00
Interest 1,500 00
Insurance fee 3,000 00
TOTAL FIXED COST (TFC) 34,500 00
TOTAL COST (T.C) = TVC 562,000 00
+TFC)
(FARM NET INCOME) = TOTAL REVENUE – TOTAL COST =1,060,500-562,000 = sh498, 500
CONCLUSION: Mr.Koech should implement the budget because he will make a profit of sh498, 500

NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO,

 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

PARTIAL BUDGET
A partial budget is one of the techniques of planning which is used to estimate the effect on profit of
some changes in the farm organisation. When a minor change in the farm pattern is contemplated a
partial budget could be used to arrive at the expected changes in profit. A partial budget tries to estimate
the effect of a change on the cost and returns of the existing farm organisation, which will be changed.
A partial budget is important in that it helps to increase the profit margin of the farm.
There are three situations under which a partial budget could be used and they in include:
When replacing one enterprise with another. E.g. replacing maize with sugarcane because of the high
gross margin profit with sugar cane.
When expanding an enterprise. E.g. expanding maize farm from 20 acres to 25 acres.
When introducing a new technique of farming e.g. instead of hand labour you introduce the use of
machines. Or changing from hand milking to machine milking.

In partial budgeting the planner asks himself four guiding questions; namely:
1) What extra cost will be incurred? (I.e. extra costs)
2) What revenue will be lost as a result of the change? (I.e. revenue foregone)
3) What cost will be saved? (I.e. costs saved)
4) What extra revenue will be gained? (I.e. extra revenue)

FORMAT FOR PREPARING A PARTIAL BUDGET

TITLE:
E.g. A PARTIAL BUDGET SHOWING A REPLACEMENT OF TWO ACRES OF MAIZE
WITH THREE DAIRY COWS

DEBIT (LOSSES) (-) SH CTS CREDIT (GAIN) (+) SHS CTS

(i). EXTRA COST - - (ii) EXTRA REVENUE- - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
-
(iii) REVENUE - - (iv) COSTS SAVED -
FOREGONE - - - - -
- - - - - -
-
NET GAIN - - NET LOSS - -
TOTAL ==== ==== === ===

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NOTE
The net gain or the profit level will determine whether the farmer should introduce the proposed plan or
not. The farmer may be required to work out several budgets to determine the enterprise with the
greatest returns.
Both the credit side and the debit side of the partial budget must be balanced, if the plan is negative then
it should be balanced on the credit side as a net loss and vice versa.
When considering the expansion of one enterprise without replacing it with another enterprise then there
is no cost saved and hence no revenue fore gone.

Example 1: The farmer who is located in high potential area would like to increase his dairy herd from
6-8 cows. In doing so, he is going to buy 2 extra cows at a cost of ksh20, 000 each. Out of these two
cows, the farmer is expecting to obtain 3,000 liters of milk, which he will sell at a price of ksh10/litre.
The two extra cows will be expected to calf down to two calves, which the farmer will sell at a total cost
of ksh25,000 (for both calves).
The farmer is also expecting to buy some concentrates and minerals for the two cows at a cost of ksh3,
000. He requires 120 man-days @ ksh.50/man-day.
He is also expecting to foot some veterinary services for the two cows at a cost of ksh500. The
depreciation of the new cows is 20% p.a.
Prepare a partial budget and find out whether it is worthy to effect the charge.

A PARTIAL BUDGET SHOWING ADDITION OF TWO DAIRY COWS INTO A HERD

DEBIT (LOSSES) (-) SH CT CREDIT (GAIN) (+) SHS CT
S S
(i). EXTRA COST (ii) EXTRA REVENUE-

Concentrates and minerals 3,000 00

Labour (120man-days xsh Milk 3000litresx 30,000 00
50 ) 6,000 00 sh10per litre

Veterinary services 500 00 Sale of calves 25,000 00

Depreciation 20%x 40,000 8,000 00

(iii) REVENUE NIL (iv) COSTS SAVED NIL

FOREGONE
NET GAIN 37,500 00
TOTAL 55,000 00 TOTALS 55,000 00
NOTE After preparing the partial budget it is found out that the change will result to an extra profit of
sh37, 500 the farmer should implement the change. This is a case of expansion of an enterprise
where there is no cost saved or revenue fore gone no revenue foregone
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Example2:
A farmer is considering purchasing a combine harvester, which is to replace the current practice of
hiring a custom combine harvester to harvest 800 acres of wheat. The cost of combine harvester is sh.
12,000,000 and life span is 15 years. The salvage value is expected to be zero (0) after that period. The
1
farmer must pay an interest of 33 3 % on the loan borrowed. Taxes and Insurance totals sh. 50,000,
which should be paid each year. In the course of the year repair cost would ksh80,000. Fuel and oil
would be 60,000 and labour would be sh50,000. The custom combine harvester charges are
sh1,500/acre for 200 acres. Using a partial budget, determine whether this plan is feasible

A PARTIAL BUDGET SHOWING COMPARISON BETWEEN OWNING VERSUS HIRING A

COMBINE HARVESTER
DEBIT (LOSSES) (-) SH CTS CREDIT (GAIN) (+) SH CTS
(i). EXTRA COST (ii) EXTRA REVENUE
FIXED COSTS Hiring out at sh1500X200 300,000 00
acres
Depreciation12, 800,000 00
000,000/15
Interest 31/3%X 400,000 00
12,000,000
50,000 00
Taxes
Insurance 50,000 00
VARIABLE COST
Repairs 80,000 00
Fuel & oil 60,000 00
Labour 50,000 00
(iii) REVENUE
FOREGONE NIL (iv) COSTS SAVED
Hiring in combine 800 acres X 1,200,000 00
sh 1500
NET GAIN 10,000 00
TOTAL 1,500,00 00 TOTAL 1,500,000 00
0
Conclusion The farmer should buy the combine harvester because he will make an extra profit of sh10,
000
Example 3:
Consider the following data on two enterprises Irish potatoes and maize.
ENTERPRISE SIZE IN Ha. TOTAL VARIABLE COST TOTAL
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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Irish Potatoes 2.5 6,250 21,250

Maize 2.5 2,250 5,625

The farmer intends to reduce maize to 2.0 ha and expand the potato area to 3.0 ha. The farmer believes
that the changes will earn him a higher income. Given that variable cost and gross output per unit
resources will change proportionally.
Work out the partial budget of the planned change and advice the farmer on the effects of the
contemplated change.

SOLUTION
ENTERPRISE COSTS IN 0.5 Ha. (sh) Revenue in 0.5 Ha.
IRISH 0.5/2.5 X 6250 = 1250(This is 0.5/2.5 x 21250 = 4250 (This is extra
POTATOES extra cost) revenue)
MAIZE 0.5/2.5 X2250 = 450 (This is 0.5/2.5 x5625 = 1125 (This is foregone
saved cost) revenue)

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A PARTIAL BUDGET SHOWING A REPLACEMENT OF 0.5 Ha. OF MAIZE WITH 0.5Ha.

OF POTATOES

DEBIT (LOSSES) (-) SH CTS CREDIT (GAIN) SHS CT

(+) S
(i). EXTRA COST (ii) EXTRA
REVENUE-

Potatoes production cost 0.5 1250 00

Ha
(0.5/2.5) X6250 =1250
. Potatoes revenue 4250 00
0.5 Ha.
(0.5/2.5)X 21,250
4250

(iii) REVENUE (iv) COSTS SAVED

FOREGONE
Maize 0.5 Ha. 450 00
Maize 0.5 Ha. 1125 00 (0.5/2.5)X2250 =450
(0.5/2.5) X 5625 =1125

NET GAIN 2325 00

TOTAL 4,700 00 TOTALS 4,700 00

NOTE After preparing the partial budget it is found out that the change will result to an extra
profit of sh2325 so the farmer should implement i the change.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Example 4:
Mrs Kiberenge who is a farmer located in Machakos would like to increase his dairy herd from 6 to8
cows. In doing so, he is going to buy 2 extra cows at a cost of ksh. 20,000 each. Out of these two cows,
the farmer is expecting to obtain 3,000 liters of milk, which he will sell at a price of ksh. 10/litre.
The two extra cows will be expected to calf down to two calves, which the farmer will sell at a total cost
of ksh. 25,000 (for both calves).
The farmer is also expecting to buy some concetration and minerals for the two cows at a cost of ksh.
3,000. He requires 120 man-days @ ksh.50/man-day.
He is also expecting to foot some veterinary services for the two cows at a cost of ksh. 500. The
depreciation of the new cows is 20% p.a.
Let us suppose that in order for the farmer to increase the herd by 2 cows, (as stated above); the farmer
has to provide grazing area for the two cows (i.e. 2ha.) which was formerly under maizeThis farmer is
expecting to produce 50 bags of maize from those 2 ha. The price of those 50 bags is expected to be ksh.
800/bag.
Land preparation is ksh. 600/ha.
Cost for planting using 12 man-days and the cost of each man-day is ksh. 50.
Fertilizers at a cost of ksh. 700/ha.
Harvesting for 4 man-days at kshs. 50 per man-day
General transport at ksh. 3,000
Cost of maize seeds is ksh. 200 per ha.
Sun drying of maize @ ksh. 15 per bag
Weeding to take 20 man-days @ sh 60 per man-day
REQUIRED: Using the above information, prepare a partial budget and explain whether the changes
are worthy.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

A PARTIAL BUDGET SHOWING A SUBSTITUTION OF 2Ha. OF MAIZE WITH TWO

DAIRY COWS

DEBIT (LOSSES) (-) SH CTS CREDIT (GAIN) (+) SHS CTS

(i). EXTRA COST (ii) EXTRA REVENUE-

Concentrates and minerals 3,000 00 Milk 3000litresx sh10per litre 30,00 00

0
Labour (120man-days 6,000 00 Sale of calves 25,00 00
xsh50) 0
Veterinary services 500 00

Depreciation 20%x 40,000 8,000 00

(iii) REVENUE (iv) COSTS SAVED

FOREGONE

Maize 50 bags x sh800 per 40,00 00 Land preparation (sh600x 1,200 00

bag 0 2Ha.)
LABOUR: planting (12man- 600 00
days sh50)
Weeding (20man-days 1,200 00
x60)
Harvesting (4man- 200 00
daysxsh50)
Fertilizer (sh700 per Ha. 1,400 00
X2Ha.)
Transport 3,000 00
Cost of drying maize(sh15per 750 00
bagxsh50)
Seeds (sh 200per Ha.x2Ha.) 400 00

NET GAIN 6,250 00

TOTAL 63,750 00 TOTALS 63,750 00

NOTE After preparing the partial budget it is found out that the change will result to an extra profit of
sh.6,250 the farmer should implement the change.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Example 5:
Mr. Kiptum has 4 hectares of arable land, 1.5 Hectares of which are under wheat, 0.8 hectares under
maize, 0.3 hectares under fodder crop and the rest under grass leys. He wishes to know whether
replacing 0.3 Hectares of maize with potatoes the following season would be worthwhile.
The fertilizer rate would have to be increased from 2 bags per hectares for maize to 2.5 bags per
hectares, for potatoes and an extra 40 man-days of casual labour per hectares would be needed as a
result of the change. Average yields of maize and potatoes are 56 and 90 bags respectively. The prices
are ksh1, 200 per bag of maize and sh1000 per bag of potatoes. Seeds costs are sh500 per 10 kg bag of
maize and sh1500 per 50 kg bag of potatoes. Fertilizer costs sh1300 per 50kg bag. Labour is paid sh120
per man-day. He would require 10 bags of potato seeds and 1 bag of maize seeds, to cover 0.3 of
hectares.
Draw up the partial budget and indicate the effects of change.

A PARTIAL BUDGET SHOWING A CHANGE FROM 0.3 HECTARES OF MAIZE 0.3

HECTARES OF POTATOES

DEBIT (LOSSES) (-) SH / CREDIT (GAIN) (+) SHS/

CTS CTS
e(i). EXTRA COST (ii) EXTRA REVENUE-
Fertilizer (potatoes) 2.5 x 0.3 975.00 Potato yields 90 x 0.3 x 1000 27,000.00
x1300 1440.00
Labour (potatoes) 40 x 0.3 x 15,000.00
120
Potato seeds 1500 x 10
(iii) REVENUE FOREGONE (iv) COSTS SAVED
Maize yield 56 x 0.3 x 1200 20,160.00 Maize seeds 1 x 500 500.00
Fertilizer for maize 2 x 0.3 x 780.00
1300
NET LOSS 9,295.00
TOTAL 37,575.00 37,575.00

It is unworthy to implement the change because the farmer will make a loss of sh9,295.00

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

QUESTION
a) State 3 types of budget used in farm management. (3marks)
b) A farmer is considering reducing his dairy farming from 20 cows to 15 cows. He also intends to buy
beef cattle (5 of them). The sale price for a cow is ksh20,000 and a beef cattle costs ksh18, 000. The
farmer intends to sell the five beef cattle at the end of the year at ksh21, 000 per animal and buy 5 more
cows at sh20, 000 each. The production of milk per cow per year is 9,000 liters, each liter of milk cost
Ksh10.
Using a partial budget show whether it is profitable or not to implement the intended change. (20
marks)

ENTERPRISE BUDGET
An enterprise is defined as a single crop or livestock commodity. It is generally a farming activity. Most
farms consists of several enterprises e.g. beans, maize or (beans and maize combined). An enterprise
budget is an estimate of all incomes and expenses associated with a specific enterprise and an estimate
of its profitability. An enterprise budget can be developed for each actual or potential enterprise in a
farm plan e.g. French bean enterprise carnation enterprise, potatoes enterprise. Each budget is developed
on the basis of a small common unit e.g. acre for crops or per head of livestock this helps in comparative
analysis for alternative competing enterprises eg compare freshian versus jersey on milk production per
head.
The components of a enterprise budget are:
1. Income or total revenue (First step is to accurately estimate the total production and
the expected output price). Yield should be output per acre i.e. average yield expected
from experience under normal weather conditions given the soil type and input level
to be used.
2. Varible cost: Variable costs are easy to ascertain since the farmer keep the receipts
for the item quantities used and prices are easy to ascertain. The variable costs like
fuel, machine repair are difficult to ascertain but can get estimates from farm records.
Enterprise budget includes a charge for opportunity cost of the capital for the period it
is tied in the enterprise. If for instance you invest sh60,000 to wheat enterprise and
use market interest. I.e. 60000 x r% x months /12..
3. Fixed costs: These are costs associated with machinery charges and land use.
Machinery cost depends on the age, size, and number of machines used in the
production. This costs are difficult to to estimate but they can be apportioned to each
enterprise where the machine is used in whole some for all enterprises ( only costs
entered are the costs which enter into production of the enterprise)

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

FORMAT OF AN ENTERPRISE BUDGET

TITLE : (e.g. AN ENTERPRISE BUDGET FOR WHEAT ON TECHNOLGY
FARM IN NAKURU DISTRICT)

EXPENSES (COSTS) VALUE /

ACRE INCOME
(REVENUE)

SH CT SH CT
S
.VARIABLE COSTS ==== == TOTAL INCOME === ==
(TVC) =

FIXED COSTS (TFC) ===

TOTAL COSTS === ==

(TC)=(TVC +TFC)

ESTIMATED ENTERPRISE FROFIT = INCOME – TC= ----------

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BREAK EVEN BUDGET

Assume that the price of the product in a purely competitive market remains the same as more is sold; it
is equal to the marginal revenue which is the addition to the total revenue of another unit sold.
The farm will tend to produce to the theoretical limit where the marginal revenue is just equal to
the marginal cost.
Where used?
1) This planning technique is used where one or more particular budget coefficients is
very uncertain and the planner want to assess the chances that the proposed change in
the farm organisation will prove profitable.
2) Break even budget is employed where there is considerable doubt and uncertainty
about the level of important variables, which are usually the yields (output) and price.
Yield and price provides an exact balance between the cost and the revenue of an
enterprise. Assuming at this level, marginal revenue is equal to zero after a farmer has
determined the break even point
When is this budget used?
1) To help the farmer know what yield to aim at given the price so that yield covers the
cost of production and leaves the farmer with nothing e.g. a farmer whose cost of
maize production is sh8600 per acre and the price of maize per bag is sh800 want to

SEP OCT NOV DEC. JAN FEB.

BALANCEB/D 337,000
INFLOW: CAPITAL 360000
SALES 80000 80000 80000 120000
BALANCE c/d 64000 91000 118000 145000 132000
TOTAL 360000 401000 171000 198000 225000 252000
Balance b/d 64000 91000 118000 145000
OUTFLOW: Eqpt. 200000
Purchases of stock 90000
Expenses 17000 17000 17000 17000 17000 17000
Rates 4000
Rent 6000
Purchases general 90000 90000 90000 90000 90000

Balance c/d 337000

TOTAL 360000 401000 171,000 198000 225000 252000
f bags one acre should produce in order to break even then a break even budget is
prepared. I.e. 8600 divide by 800. i.e. 10.75bags or approximately 11bags.
2) Used to compare enterprise performance where you are sure of the performance of
one of the enterprises. If you want the gross margin of the two enterprises to be the
same or as close to each other as possible then a break-even budget has to be used
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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

3) Used during price inflation i.e. during price changes .the break-even budget is used to
determine price in relation to the cost of production in order to maintain the same
level of income if the yield does not change.
4) Used when introducing a new enterprise in a new area. The yield potential given in
the district guidelines must be met. The break-even budget helps the farmer on what
exact thing the farmer needs to aim at so that the revenue derived should be equal to
the one recommended in the district guidelines.
Example: Calculate the break-even yield (BEY) given that the price of a bag of
maize is sh500 and the total cost (TC) is sh23,500
BEY=TC/PRICE=23,500/500=47Bags
And if the yield is 30 bags the break-even price (BEP) is SH783.30

CASH FLOW BUDGET

Cash budget is a forecast of the cash requirements month-by-month etc.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

GROSS MARGIN ANALYSIS (GMA)

Gross margin analysis is the difference between gross output and the variable cost.
GMA = total output- total variable cost
GMA can therefore be used to rank enterprises according to their profitability, and on this basis, the
farmer may be guided as to what combination of the enterprise will give the highest total gross margin
from that farm unit. In budgeting the estimation of each crop gross margin is taken as the difference
between the total revenue and the total variable cost per unit of any fixed factor of production, which is
required to produce the crop in question.
The data used in GMA can be obtained from:
Average farmer to ideal one (ii) The district guidelines (iii)Research stations
EXAMPLE AND SOLUTION
Mr. Gathwara a farmer in Maragwa district intends to produces the following output:
30 bags of maize@ sh1,000,
20 bags of beans @ sh2, 000
10 bags of potatoes @ sh400
To produce the above he buys:
100kg of maize seeds @ sh200
100kg of beans seeds @ sh50
50kg of potatoes @ sh100 per 50kg bag
Land preparation per each enterprise sh400
Fertiliser per each enterprise is sh500
Sprays & dusting per each enterprise is sh300
Transport per each enterprise is sh200
Disease control per each enterprise is sh200

Using the above information , work out the gross margin of each enterprise and rank the enterprises
according to their productivity.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

SOLUTION
ENTERPRISE MAIZE BEANS POTATOES
TOTAL OUTPUT 30BAGS X 20 bags Xsh2,000 =sh 10 bags Xsh400 =sh4,
SH1000=sh30, 000 40,000 000
VARIBLE COSTS
Seeds 100kg X 100kg Xsh50 =sh5, 000 1bag Xsh100 = sh100
sh200=sh20,000
Land preparation Sh400 Sh400 Sh400
fertilisers Sh500 Sh500 Sh500
Spraying and dusting Sh300 Sh300 Sh300
transport Sh200 Sh200 Sh200
Disease control Sh200 Sh200 Sh200
TOTAL SH21, 600 SH 6,600 SH1,700
VARIABLE COST
GROSS MARGIN SH8,400 SH33,400 SH2,300
Ranking the enterprises according to productivity
Beans GM of sh33, 400
Maize GM of sh8, 400
Potatoes Gm of sh2,300
NB Gross margin is a contribution to the payment of fixed costs.
The reason for getting gross margin analysis is because it is hard to get fixed cost at all the marginal
returns.
IMPORTANCE OF GROSS MARGIN ANALYSIS
1. Comparing the performance of one farmer and another under the same ecological conditions.
2. Comparing the performance between one period and another in the same farm.
3. Comparing the contribution of each enterprise in the same farm.
4. Used by farmers to measure the level of profit
5. Used for planning especially e.g. future planning by farm managers in order to improve farm
organisation.
LIMITATIONS OF THE GROSS MARGIN ANALYSIS
1. GMA doesn’t usually take care of the fixed cost which will also affect the agricultural
production.
2. GMA doesn’t make allowance for complementary and supplementary relationship
which usually exist between enterprises
3. There is misinterpretation or confusions, which can easily occur unless the
calculations for gross margin is seriously examined e.g. regular labour is fixed as
compared to casual labour.
4. Outputs and inputs change with an increasing scale of an enterprise may not
necessarily maintain its gross margin per unit because of the diminishing return
principle.
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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Farm layout
Meaning and purpose of farm layout
What is a farm layout? Is the location and arrangement of the farm buildings, fields, water systems, soil
conservation structures etc. on the farm and in relation to one another?
Importance of the farm layout.
1. Has a profound impact on the efficiency of land, labour and machinery utilization of
these resources leading to maximum farm profit. A poor layout could lead to
considerable:
a) Wastage of time
b) Wastage of labour effort in walking etc
c) Wastage of machinery time
d) Wastage of land
2. Farming is a business and all farmers should aim at maximizing profit. In order to
maximize profit, the farmer should choose the most suitable and profitable enterprise.
Profit will not be realized if the enterprise chosen are not allocated proper areas that
have fertile soils and are relatively flat. Areas with soils which are less fertile should
be kept under livestock grazing. Horticultural crops should be grown near rivers or
where there is good supply of water. The area near the road is given to development of
the farmstead. The allocation and planning of various enterprises and uses within the
farm is known as farm layout.

Stages of developing a farm layout

1. Selection of enterprises: The farmer can select the suitable enterprises for his farm by
analyzing the data from various sources of information. Journals, newspapers,
magazines, extension officers etc. The climatic factors, and his personal tastes and
experience are very important in making a choice of suitable enterprise and use.
2. To make a choice on rotational programme. In terms of sequence of crops and grass
leys, length of rotation in years to complete the rotation cycle.
3. Drawing of rough sketch of the map of the farm. The map should indicate the possible
areas where various enterprises will be allocated.
4. Checking of the feasibility of the farm layout programme. The Agricultural extension
officer should go over the farm and check whether the areas which have been allocated
various enterprises are the most suitable for that particular enterprise. He can advise
the farmer to do some necessary changes
5. The farmer then calls for physical surveyors form the ministry of Agriculture for
actual surveying. The contours and actual size of the different plots are drawn properly
on the map.
6. Finally the farmer demarcates the field, laying out the fences, contours, water systems,
roads, homesteads etc.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Factors to consider when planning a farm layout

The farmer should consider the following factors in order to come out with a farm layout in which
land will be used efficiently according to its potentiality.
1. Climate factors:The most important climatic factors which determine the selection
and establishment of enterprises are rainfall, temperature and wind. There are some
enterprises which require a lot of moisture, others like coconut require hot climate.
The wind direction will determine where certain enterprises should be sited in relation
to the farmhouses. Animal houses, dips, and any thing that produces foul odours
should be sited on the leeward side of the farmhouse.
2. Soil type: Soil which is well drained and fertile should be allocated for arable
farming. The less fertile should be given to grazing and growing of trees.
3. Topography: Flat land is allocated for field crops so that cultivation implements can
be used easily. The steep area should be terraced and used either for growing of tree
crops or animal grazing
4. Accessibility to all fields: All areas where the enterprises are to be established should
be accessible from the farmstead and the workers quarters. Short road distances
should be established between one field to another one and to the farmstead.
5. Communication and other amenities: The farmhouse should be sited in such a way
that it is near and accessible to the main road, electricity supply and telephone line.
6. The size of the farm:Several suitable enterprises can be established on a large-scale
farm. A small-scale farm can hold only a few enterprises. In the latter case a farmer
could have only one enterprise when the land is too small.
7. Government regulations: There are certain regulations which control establishment
of the enterprises on the farm. In Kenya the area along the riverbank is not supposed
to be cultivated. Nowadays a forest which has mainly indigenous trees should not be
cleared without permission from the chief. Another example concerns growing of
certain crops. Farmers seek permission from the extension officers when they want to
establish coffee, because of quota system. Health regulation determines conditions
that are necessary when one is constructing a farmhouse.
8. Security: There are certain enterprises, which must be established near the
farmhouse. The milking shed, the calf pens and the poultry house should be sited near
the farmhouse because they need very close supervision. Likewise the garage in
which implements are kept during the night should be sited near the farmhouse. The
Rotation Programme: will depend on the enterprises selected. Should be such as 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 the land. A good
rotation programme will include a grass leys and hence some livestock enterprise.

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Layout: - Field layout should also satisfy the following if it is to be efficient:

1. Soil 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 along the
contour. Cultivation should be along the contour. Field boundaries should not be
erosion, waterway, and roads should run as far as possible along the contour to
prevent erosion
2. Size and shape of the field: Particularly where machinery is to be used on 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 fields should be
as regular as possible in shape to ensure maxi /mum utilization of the land (odd
corners are difficult to plough etc) and minimum turning and unnecessary slowing
down of machinery) in operation (Illustration).
3. Number of fields: For a smooth rotation programme, it is necessary that the number
of fields should correspond with the length of the rotation in years. The number of
fields should be equal to or be multiple of the number of years in the rotation. If the
rotation programme is to be carried out smoothly e.g. Eight years in the rotation.
Eight, sixteen, twenty-four etc. fields.
4. Uniformity of fields: Fields should be as uniform as possible in
a) Topography
b) Drainage
c) 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.
5. Economy in Fencing: Permanent fences should 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.
6. Efficiency of the livestock system: All 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.
7. Location of the Farm Buildings, Roads and water systems: Farm buildings should
be as central as possible to minimize transportation and increase farming efficiency.
a. As near the centre as possible to ensure accessibility to each field.
Where possible each field should be contiguous to the homestead.
b. Should (building) be as easily accessible from the main roads as
possible. There may be advantage in locating the farmstead near a
major road.

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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 unnecessary
much land or become erosion waterways.
e. Water systems should be such as to ensure adequate supply of water
for domestic and livestock use at least cost. -Minimum of
piping etc.
f. A trough between every two fields.
g. The arrangement of buildings in relation to one another should be such
as 1) to minimize unnecessary walking or transportation – every 100ft
of unnecessary walking between one building and another means 14
miles a year for each daily round trip. Also the arrangement should
facilitate free flow of cattle, materials and products being loaded etc.
h. Flexibility: The layout should be as flexible as possible so that
changes are easily introduced as necessary.
This can be ensured by avoiding
Permanent hedges or fences inside the farm
Completely permanent structures e.g. roads, watering points,
troughs, etc.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Financial involvement in planning

No business can be run without an input. In farming finance is involved and therefore we say that
investment is met.

The level of investment depends on many factors e.g.

1. Quality of labour (skilled/ unskilled),---
2. .The scale of operations
3. The degree of mechanization.
4. Intensification
All these factors determine the amount of money put into that business. It is therefore important to know
that the higher the level of investment the higher will be the expected returns. Investment income should
be in a position to meet charges such as interest rates.
The investment income minus all charges must justify the level of investment e.g. labour, machinery &
other inputs involve a great amount of money. A big percent of this money will be consumed by labour
and machinery because they form the largest share of the inputs. Machinery may also involve other costs
due to maintenance and depreciation.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Forms of Business Ownership

Sole Proprietorship
The formation of this for5m of business enterprise is simple since no formal procedure is required. The
trader can obtain a license by paying a small fee. The management, liability and source of capital are in
the hands of the proprietor.

ADVANTAGES
1. FREEDOM OF ACTION: proprietor is his own boss and no one can change his
decisions.
2. RETENTION OF PROFIT: there is no sharing of profit
3. SECRECY: The success of his business may be based on his secrecy for example in
the region of competition.
4. PERSONAL CONTACT: It is possible for a sole proprietor to have a close contact
with his employees and customers.
5. MINIMUM LEGAL FOMALITIES: He does not deal with other people as far as his
business is concerned.

DISADVANTAGES
1. NO SPECIALIZATION IN MANAGEMENT: It will be very difficult for one person
to manage the whole business properly, for instanc4e her may be good in accounts
and a bad purchaser, this may lead bankrupsy.
2. UNLIMITED LIABILITIES: He does not share losses with any body
3. LACK OF CAPITAL: This is a limiting factor if he want to expand his business,
capital may hinder.
4. LACK OF CONTINUITY: the death of the owner may affect the continuity of the
business.
Partnership
A partnership is a contract between two or more persons who have agreed to carry on a business.
ADVANTAGES OF PARTNERSHIP
1. Partners can raise more capital than sole traders enhancing expansion of the business.
2. The labour is shared
3. New talents are brought to the firm and some degree of specialisation is possible.
4. Losses and liabilities are shared equally, which is an advantage over the sole trader
who bears them alone.
5. It is simpler to form a partnership than a large company since only the registration of
name is required.
6. There is incentives between the partners e.g. bonus.

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DISADVANTAGES OF PARTNERSHIP
1. A partnership has unlimited liability and this could have an effect upon the partners’
personal property if the farm fails.
2. The death or retirement of a partner may result into a resolution of a partnership
3. With two or more persons operating a partnerships disputes can arise.
4. Some partners are inactive thus reducing morale of the active ones.
5. Profits are shared which result in each of the partners receiving a smaller amount than
he would if he was a sole trader.
6. Delay in decision due to discussions between the partners.

Sole Proprietorship
The formation of this for5m of business enterprise is simple since no formal procedure is required. The
trader can obtain a license by paying a small fee. The management, liability and source of capital are in
the hands of the proprietor.
ADVANTAGES
1) FREEDOM OF ACTION: proprietor is his own boss and no one can change his
decisions.
2) RETENTION OF PROFIT: there is no sharing of profit
3) SECRECY: The success of his business may be based on his secrecy for example in
the region of competition.
4) PERSONAL CONTACT: It is possible for a sole proprietor to have a close contact
with his employees and customers.
5) MINIMUM LEGAL FOMALITIES: He does not deal with other people as far as
his business is concerned.
DISADVANTAGES
1) NO SPECIALIZATION IN MANAGEMENT: It will be very difficult for one
person to manage the whole business properly, for instanc4e her may be good in
accounts and a bad purchaser, this may lead bankruptcy.
2) UNLIMITED LIABILITIES: He does not share losses with any body
3) LACK OF CAPITAL: This is a limiting factor if he want to expand his business,
capital may hinder.
4) LACK OF CONTINUITY: the death of the owner may affect the continuity of the
business.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Partnership
A partnership is a contract between two or more persons who have agreed to carry on a business.
ADVANTAGES OF PARTNERSHIP
1. Partners can raise more capital than sole traders enhancing expansion of the business.
2. The labour is shared
3. New talents are brought to the firm and some degree of specialisation is possible.
4. Losses and liabilities are shared equally, which is an advantage over the sole trader
who bears them alone.
5. It is simpler to form a partnership than a large company since only the registration of
name is required.
6. There is incentives between the partners e.g. bonus.

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 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

DISADVANTAGES OF PARTNERSHIP
11. A partnership has unlimited liability and this could have an effect upon the partners’
personal property if the farm fails.
12. The death or retirement of a partner may result into a resolution of a partnership
13. With two or more persons operating a partnerships disputes can arise.
14. Some partners are inactive thus reducing morale of the active ones.
15. Profits are shared which result in each of the partners receiving a smaller amount than
he would if he was a sole trader.
16. Delay in decision due to discussions between the partners.
TYPES OF PARTNERSHIP
10) Temporarly partnership. Formed for a specified period of a specified purpose at
expiry of which the partnership is dissolved e.g. partnership solely formed for
construction of houses, roads etc. for which they might tendered. Temporary
partnership are also called Joint ventures.
11) Permanent partnership. Are intended to continue indefinitely i.e. their end is not
known at the time of formation e.g. establishing a sugar factory, bakery, posho mills
etc.
TYPES OF PARTNERS
3) Active or dormant partners. An active partner plays an active role in the affairs of the
business apart from providing capital and sharing profit and losses. He/she takes part
in management of the firm and can be given an area of responsibility marketing. A
dormant partner (or sleeping or silent partner) takes no active part in the running of
the business but shares the profit and losses and is equally responsible for the debts of
the firm.
4) General or limited partners. General partner: the law requires that at least there be
one general partner in a firm hence a general partner has unlimited liability and
therefore may be called upon to meet the firms debts from his or her own resources
should the need arise. A limited partner: this is a person whose liability towards the
debts incurred by the business is limited to a stated sum, usually capital contributed by
him, hence the creditors will have no right over his personal possessions .He/she does
not take an active part in the running of a business or to act on behalf of the firm. A
partnership that has any limited partner is called limited partnership.
5) Major or minor partners
6) Real or quasi partners. Quasi partner: He or she does not contribute any capital or
take any part in the business but allows the firm to use his name as a partner. He or she
is generally not liable for the debts of the firm. These are usually reputable
businessmen or people of high social integrity. As a partner he or she gets a small
share in profits in exchange for the use of his or her name. Hence he/she is not a real
partner in the firm.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO,
 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

FORMATION OF A PARTNERSHIP
No legal formalities apart from registration. But it is important to have a written agreement before
entering into a partnership.
Such an agreement is called partnership deed or partnership agreement
It is intended to outline the basis on which the partnership is being formed. This takes care of the future
misunderstanding or needs.

The partnership deed states the following:

(i.e. contents of a partnership deed
1) Name of the firm
2) Name, address and the occupation of each partner
3) Status or type of each partner e.g. active dormant etc.
4) Capital too be contributed by each partner
5) The ratio in which the partners will share profit and losses.
6) Salary, allowances and rights of each partner
i. Salary if any payable to each partner
ii. Interest to be allowed to capital
iii. Allowances or facilities e.g. free house
iv. Right of signing documents on behalf of the business.
7) .Duties allocated to partners
8) The manner in which the books of account would be kept
9) Procedure to be followed at the dissolution of partnership
10) the duration of partnership if it is a temporally partnership
11) The purpose for which the firm is established

NOTE
In absence of a written agreement or the event of an ambiguity in it, the provision of the partnership act
1934 cap.29 apply. This act states that:
1) Every partner has a right to take part in the conduct of the business
2) In case of any differences arising as to ordinary matters connected with the
business, the decision may be taken by the majority of the partners.
3) No change may be made in the nature of the business, without the consent of all
partners
4) All profits and losses are to be shared equally by partners
5) No interest to be allowed on capital
6) No salary to be allowed on any partner
7) 5% interest is to be paid on any loans advanced to the business (other than capital)
by any partner
8) Every partner will have the right to inspect the firm’s books of account.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO,
 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Private Companies
This is an association of persons who contribute the capital to be used in the business hoping to share
profits and losses to the extent of the share they which they have brought

Advantages of private companies

1) Large amount of capital can be raised
2) Liabilities of the shareholders are limited to the amount of capital which they have
contributed.
3) Output can be increased
4) More job vacancies can be created

Disadvantages of private companies

1) It is difficult for one to have personal touch with the business and employees
2) Sometimes more time and money is spent on documentation to control minor things.
3) Salaried managers who may not have much interest in the junior staff do the work.
This often leads to strikes.
4) It takes more time to make decisions

State Corporations
A state corporation is a company in which a government holds either all the share capital or a majority
of it at least 51%. It is usually created by an act of parliament, which clearly defines its aims, and
objectives etc .It operates to make profit, which is surrendered to the government.

State co-operations have boards of directors. The government nominates or appoints all or the majority
of the directors. The directors are usually appointed for first terms. The chairman and or the managing
director (M.D) are full time officers of the co-operation and others directors are often serving civil
servants.

REASONS FOR STATE COPORATION

Advantages of state corporations
1) To ensure fair distribution of income i.e. (providing employment to Wananchi
commodities etc.
2) Provisions of essentials services e.g. electricity water etc.
3) To take care of risky activities e.g. atomic energy
4) Control e.g. subsiding employment during recession, slow down the rate of infection.
5) To reduce domination of business by foreign especially in developing countries like
Kenya.
6) Creation of monopoly hence benefiting from economies of scale i.e. large-scale
production e.g. Kenya power and Lighting Company Ltd.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO,
 FARM BUSINESS MANAGEMENT NOTES COMPILED BY ENGINEER ELIAS WAWERU NGOTHO

Disadvantages of state corporations

1) Control and economy by the government makes it difficult for national Industries to
carry out long-tem planning e.g. expansion.
2) Monopoly is not desirable for faster and dynamic economic development in a
country. Example – water supply electricity, posts and Telecommuters etc and
taking. In some areas of Kenya because the state dominating them by use of too
much power which are mainly political and not economic.
3) State Corporation are always better placed hence disadvantages the private investors.
4) Appointments of the top managers/directors are always political. These managers or
directors may have little or no knowledge in business techniques. Most of their
decision is geared to the publics’ points of view but which may be economically
unsound.
5) Some state corporations prove uneconomical in some areas and hence losses this
sustained are passed on to the general public in the form of increased taxes.
Remember the recent (i.e. in past few years) increase in prices of essential
commodities like sugar, unga (maize meal) bread, cooking fats etc.

Parastatal Bodies.
These are organizations formed by the government to perform specific functions. They are also created
by an Act of parliament, which clearly defines their aims and objectives formally, the bodies functions
were not necessarily commercially based but currently the bodies are required to be commercially
viable, hence provide commercial service and therefore make profit. Examples – National Cereal and
produce Board of Kenya, coffee Board of Kenya etc. Unlike stat public corporations, Parastatal does
not have any share capital. Also managed by people appointed or nominated by the government just like
in the state corporations.

EXAMPLES OF INDIVIDUAL STATE CORPORATIONS PARASTATALS

Kenya Seed Company (KSC) Kenya National Trading Corporation

National Cereals and Produce Board of (KNTC)
Kenya (NCPK) Kenya Posts and Telecommunication
Cotton Lint and seed marketing board. (KP&LC)
Mumias Sugar Company Kenya Power and Lighting Company
Chemilil Sugar Company Ltd. (KPLC)
Nzoia Sugar Company
South Nyanza Sugar Company
Kenya Agricultural finances corporation
of Kenya (AFC)
Agricultural Development Corporation
(ADC)

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO,
Kenya Airways (KA)
Kenya Ports Authority (KPA)
Pyrethrum Board of Kenya (KBK)
Kenya Tea Development Authority (KTDA)
Coffee Board of Kenya (CBK)
National Bank of Kenya (NBK)
Kenya Commercial Bank (KCB)
Railways
Kenya Notes Corporation
Kenya Meat Commission
Central Bank of Kenya etc

NATIONAL CEREALS AND PRODUCE BOARD (NCPB)

The national cereal and produce board is a marketing board set up by the government. It
is a merger of the former maize and produce board and former wheat board of Kenya and
came into existence following the recommendation of the probe team on statutory boards.
The two bodies started functioning as national cereals and produce board on 1 st January
1980, while awaiting official merges through parliament.

FUNTIONS OF NCPB: Ensuring that the growers of maize, wheat, rice, barley,
sorghum and other produce receive a fair price for their crop and guaranteed market.
1) . Safe guards the consumers by controlling the retail price of the
cereals and produce.
2) The organized marketing system benefits both the produce and the
consumer and contributes to Kenya’s Agricultural economy.
3) Controls movements of the cereals and produce to stabilize prices and
ensure fair distribution throughout the country.
4) Moves and distributes cereals and produce from producing areas to
consumption areas.
5) Stores surplus produce in strategic reserves for future use
6) Makes crop field surveys and estimates to enable the government to
plan ahead on the country’s food requirements.
7) Advice farmers on crop production and movement to the board’s
depots.
8) The pests control officer’s advice farmers on storage and pest control.
9) Buys directly from farmers to ease the problem of transport and
storage.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
WHAT THE BOARD MARKETS
The board markets maize (white and yellow) wheat (over twenty varieties) rice (four
varieties) and over thirty other crops including beans, peas, oil seeds and sorghum and
millet.
GRAIN PROCUREMENT BY NATIONAL CEREAL AND PRODUCE BOARD
1. AT STORE AND DEPOT The national cereal and produce board
buys farmers’ produce through a network of stores and depots situated
in farming areas, consumption and processing and on communication
points for maximum efficiency in receiving and distributing service.In
all there are over 40 such depots and stores principally for maize and
produce and over 15 for wheat with a total capacity of just over 10
million bags. Part of the above capacity includes bulk-handling
facilities for maize at Kitale and Nakuru and for wheat in Narok and
Nakuru. The bulk facilities reduce farmers’ post harvest labour costs is
bear minimum.
2. AT TRANSIT STORES AND BUYING CENTRES Construction of
transit stores and opening buying centers encourage higher production
and improve the efficiency of food production. This has proved
effective in most parts of the Rift valley, as records have shown that
most of the produce delivered to the board comes through the transit
stores or buying centers system.
3. BUYING PRICES The government prior to the opening of the buying
season announces maize and wheat buying prices annually. For all
produce the government aims at paying farmers on delivery.
4. PRODUCE BOUGHT. As shown else where above, the board list of
produce is is very varied. The list begins with major cereals such as
maize and wheat and goes down to the relatively less common ones
such as simsim, mtama, wimbi etc.
5. DEPOT AND STORE PERSONNELS. Each depot is managed by a
team compost of the depot manager (overall in charge) a cashier,
record clerks, produce inspectors and other supporting staff.
6. PEST CONTROL The board being the national granary has a
department that deals with pest and maintenance of quality pest
control. The major pests that the board deals with are: Granary
weevils-Sitophilus granaries Rust- red flour beetles- Tribolium
casterium Warehouse moth

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Agricultural Credit
Capital is a limiting factor in the agricultural sector. Farmers can overcome this limitation
by borrowing capital. Borrowed capital is called credit or loan. By agricultural credit it is
meant borrowings obtainable by the farming industry either in cash or kind or both.
Farmers pay it back with some interest. In most cases, the loan is given against a security
such as land title deed, building, machinery etc.
Why a farmer needs credit (purpose)
The sole purpose of giving agricultural credit to the farming industry is to provide
and facilitate the provision of financial assistance of:
1) Agricultural purpose
2) Promoting increased agricultural activities
3) The processing and marketing of the agricultural production.
4) Credit is used in the promotion of various agricultural process such as
buying crop(s) –coffee maize beans, tea etc. purchasing farm machinery
or equipment, farming tools etc. developing a farm enterprise e.g.
poultry unit, dairy beef etc. Installing and maintaining a processing
industry for agricultural produce eg ginnery for cotton, canning factory,
sugar factory, tea factory etc..
Therefore could own all or some or less of the factors of production ( (i.e. land, labour ,
capital and entrepreneurship), when he is going into farming. He can rent land if he has
capital and labour, he could borrow capital so credit (borrowing) gives control of capital
just as leasing and or renting gives control of land hiring labour for wages gives control
of labour.
High levels of farm income and high standard of living are based on the right
combination of labour, land, capital and management. When capital is limited, relative to
other resources the addition of more capital increases the economic efficiencyof all the
other resourses available,credit should therefore be sought when capital is short in supply
In Kenya, like most developing countries capital is often a limiting factor in
farming.Credit is therefore very important for a farmer in order to increase his farm
income.
One major way of increasing farm income is the adoption of modern technology. This
involves the use of better crop varieties suitable for a given region ie new seed varieties
or planting materials.
Materials such as fertilizers, keeping high yielding dairy cows, i.e. better livestock
breeds, better and improved methods of crops and livestock protection and adoption of
intermediate technology etc.
All these prerequisites require a great deal of capita and credit must therefore be available
to farmers if they (farmers) have to adopt the new technology and purchase more inputs.

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Principles of borrowing
The following factors affect the desire for a farmer to pay back a loan. A farmer should
therefore consider them in deciding to get a loan in his farming business.
1) When to borrow. Generally, borrowing, risks are smallest/ lowest when
commodity prices levels are just beginning to move upwards and highest
at the end of the rising price trend. Sometimes the need to borrow money
may be so urgent that the farmers will take prices as given, so long as he
estimates the additional returns as a result of the borrowing will be enough
to pay back the loan and still leave him with some profits.
2) How much to borrow. This is determined by several factors e.g. land
potential fixed assets, farming ability, age and health of farmers etc.
Equity principle is very important; equity ratio is the value of the assets
owned by the farmers as a percentage of the total value of the assets in the
farm business. The more the farm borrows, the more the equity diminishes
and so risk increases because there are increased chances of becoming
bankrupt, so the equity ratio is an indication of the degree of risks facing a
farm business.
3) The length of the loan and repayment structure
4) What to use as a security. Security (value of real estate property). Security
is the absolute limitation to borrowing. In most credit institutions require
some real estate to be pledged as security e.g. land, title deeds, permanent
(commercial) buildings etc.
5) The use to which credit will be put. The opportunity cost principle ( ie
return fore gone when a resource factor is taken from its best alternative
used) eg along with risks considerations set the limits to the use of the
capital in any one enterprise. A farmer with limited capital has many
alternatives invest opportunities. To maximize profit, each successive
investment is placed where returns are highest. However, the most
profitable investment may be associated with high risks and a farmer may
invest where returns are somewhat lower but more certain.

Self-liquidating loans
Self-liquidating loans is the type of loan made for an investment that promises to return
more than enough to repay the entire loan plus interest. The farmer is assured that the
funds will be available to repay the entire loans when due. So borrowing money for
fertilizer or protein feed for livestock might be preferable to borrowing money for wiring
farm buildings, installing a pressure water system on a farm etc. if borrowed fund s are
used on such improvements there must be already enough income or a prospect of such to
repay the loan.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Types of credit
There are three categories of credit namely:
1. Short term credit: Short-term credit is payable within one year. It is
used for buying working capital such as seeds, feeds and fertilisers etc.
an example of short term credit is the seasonal credit from Agricultural
Finance Corporation (AFC)
2. Medium term credit: Medium term credit is payable within two to
five years. It is used for farm development projects such as fencing;
buying machinery, soil conservation, buying livestock etc.
3. Long term credit: Long-term credit is payable within 5 to 15 years. It
is used to purchase land, effect major improvements on the land such
as soil conservation works, establish tree crops and building
construction.
NB/ Credit could also be classified as
1) Hard loan. The hard loan is offered against substantial security, usually
immovable assets like land.
2) Soft loan. Soft loan can be given with a small security e.g. pay slip or
no security at all.
Purpose of credit
1. Development . eg purchase of land, developing land, irrigation,
purchase of grade animals etc.
2. Production. Ie buy inputs,eg drugs fertilizers etc.
3. Consumption. Eg build living house, clothing, car, bicycle etc.
4. Marketing. Eg to purchase trucks for transportation of farmers
produce
5. Storage. Ie construct storages

Terms of Credit
The lender should stipulate
1) Terms under which credit should be granted i.e. rate of interest and
other charges.
2) The form in which credit is given i.e. cash or kind or both
3) The way in which it is disbursed i.e. through a supplier of goods or
services or directly through the farm.
4) Maturity dates for the loan
NB/
1) Interest- is the cost of credit (borrowed capital)
2) Security – is pledge, protection against assets
3) Moratorium- A period of grace between the time credit is advanced
and the time the repayment schedule starts.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Sources of Agricultural Credit
1. Government institutions e.g. Agricultural finance co-operation AFC
etc. AFC is a parastatal body set up by the government to give loans
ranging from short-term credits to long-term credits to the farmers.
AFC branches are spread all over the country and headquarters is in
Nairobi. interest rates of AFC are variable
2. Commercial banking institutions e.g. Kenya commercial bank, Co-
operative bank of Kenya, National bank of Kenya. Commercial banks
advance short and medium term loans to farmers they usually lend on
hard terms ie on buildings or land title deeds as security. interest rates
are variable.
3. Co-operative societies / union eg Kenya grain growers co-operative
union (KGGCU) or KFA. Co-operative societies can get credit for
their members their interest rates are usually lower than banks
4. Private input suppliers e.g. sugar companies e.g. Mumias, Sugar
company etc, MEA Ltd.
5. Crop boards. These are various crop boards that are established by an
act of parliament to look after certain crops. Some offer credit to
farmers e.g. KTDA (Kenya tea development agencies). and Cotton
board of Kenya. These boards recover their money through deductions
made on farmers’ payouts.
6. Others include hire purchase companies, insurance companies,
NGOS, friends, youth dev. Fund, micro financers. Etc.

Problems With Agricultural Credit

1. The majority of the people in the rural are not credit worthy or they
just fear loan hence their access to credit facilities is rendered difficult
2. Favouritism (or nepotism or sectionalism and even tribalism are
common in the granting of loan applicant.- corruption
3. Successful loan applicants sometimes mis-channel loan to the
unintended projects. A few such people may eventually fail to pay
back the loan. This reduces credit facilities available to other potential
applicants.
4. Agricultural credit itself, is a limited resource
5. Low level of education amongst many farmers
6. Unfavourable environmental conditions may result into low yields and
such a farmer would not be able to pay for the loan.
7. Government policy
8. Marketing (price fluctuations)

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Credit Management
For a credit service to be effective, especially with small-scale farmers, the following
should be done
Extension services should be provided to show them how to use credit
The credit should be paid back as per the term of agreement. In case of any delays then a
notice should be given in good time.
There should be an established marketing system that regularly supplies the farmers with
farm inputs and also market their produce at reasonable prices
It is preferable to grant the inexperienced farmers credit in kind. E4g if a farmer want a
loan to buy a cow, then it should be bought and given to him
The loan should be used for the purpose for which it was applied. If it is well used the
farmer should be able to repay it plus the interest and to remain better off than before.
Solution to Agricultural lending problems
1. Due to high rate of defaulters among borrowers, banks and other
lending institutions charge high interest rates , in order to remain in
business.
2. It is common to find many cases of defaulting in auctioning of
defaulters.
3. Many lending institutions and organizations before availing a loan to a
farmer ensure that the farmer offer security like
 Title deeds
 House morgages
 Several referees or guarantors who are able to pay in case the
borrower defaults

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 Balance Sheet
Balance sheet is a financial statement drawn to show the financial position of a business
as at a particular date. It is usually drawn at the end of an accounting period or financial
year. Some times it is drawn at the opening of an accounting period. A balance sheet
drawn at the beginning of an accounting period is known as an opening balance sheet and
that drawn at the end of the accounting period is a closing balance sheet. Usually the
closing balance sheet of an accounting period is the opening balance sheet of the next
accounting period.
The balance sheet has TWO sides i.e. the left hand side (LHS) and the right hand side
(RHS).
The LHS shows liabilities and the right hand side the assets. The balance sheet always
shows the business as being in a condition of equality: i.e. what it owns equals to either
its creditors or owners. This can be expressed in form of the following equation
Assets =liabilities +Net capital (owners equity or net worth)
Liabilities consists of debts that the farmer or the business owes other business firms; for
example:
1. Bank overdrafts
2. Debt due for goods and services
3. Loans
4. Services for which other people have paid to the business in advance,
etc.
Liabilities can be long-term or current:
LIABILITIES
1. LONG -TERM LIABILITIES: Long-term liabilities are those debts
whose payment period is more than one year; for example
development loans from banks or Agricultural finance corporation
(AFC).
2. CURRENT LIABILITIES: Current liabilities are those debts that
must be cleared in a year’s time. This includes rent due, electricity,
water and telephone bills, worker’s wages, bank overdrafts, debts
payable etc. They arise largely through the purchase of goods for use
in the business firm and are linked with the current assets.

ASSETS
Assets are properties owned by the business and have a monetary value attached to
them. They include property of all kinds e.g. money, goods in store, livestock,
perennial crops, buildings, machinery and equipment, debts due from other people
and goods and services paid for in advance. Assets may be FIXED or CURRENT.
1) Fixed assets: Fixed assets consists of property of a durable nature,
which is likely to be retained over a considerable period, at least one
year e.g. buildings ,equipment, machinery,

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 2) Current assets: Current assets are those items likely to be held over a
short time, usually less than a year. They consist of debts receivable,
cash, farm produce to be sold, inputs in store etc.

For the purpose of drawing a balance sheet, assets are divided as already stated and
written in the order of permanency or liquidity. When the order of permanency is used,
the most permanent ones are written first and the least last. On the other hand, when the
order of liquidity is used, the most liquid assets are written first and the most permanent
last. Under liabilities, when the permanent order is used capital appears first followed by
long term liabilities and lastly the current liabilities. The reverse is the case if the liquidity
order is used. ABELI FARM balance sheet is an example where the order of permanency
is used. (This is the one mainly used)
In summary, a balance sheet has got two sides:
Assets/possessions and
Liabilities/debts
The value of the total assets less or minus the value of total liabilities gives the firm’s net
worth showing whether the business is solvent or insolvent. A balance sheet is a sure
way of distinguishing between solvents and profitability of a business. When listing the
assets, you start with the most fixed assets, the more current one and finally the liquid
ones. When listing the liabilities of the business, we also follow the same procedure.
You start with the most fixed one, them move to the current ones and the liquid liabilities.

FORMAT OF A BALANCE SHEET

1) heading:
ST
1 LINE: Name of the person or the business firm for whom the balance sheet is
being drawn
2ND LINE: Title of the statement i.e. Balance sheet
3RD LINE: Date on which it has been drawn, preceded by the words “as at”

2) Liability side (left hand side), which shows:

a) Current liabilities ; short term debts, bank overdrafts ,
rents etc.
b) Long term liabilities; debts payable n e.g. loans for
purchasing land.
The capital i.e. owner’s equity or net worth

3) Assets side (right hand side), which shows:

(a) Current assets; cash in hand, cash in bank, debts
receivable, livestock, crops in store etc.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 (b) Fixed assets e.g. machinery, equipment, furniture,
and fitting, motor vehicles, perennial crops,
buildings land etc.
Solvency and insolvency If the value of assets exceeds that of liabilities the business
is said to be solvent. This means that it can meet all its liabilities and have a balance left.
The balance is what is referred to as capital or net worth .If the value of liabilities
exceeds the value of assets the business is said to be insolvent i.e. it cannot meet all it
owes other people. In this case the balance falls on the right side of the balance sheet as a
net capital deficit.

Farm managers have two main financial problems important to accounting namely:
1) To run the business profitably and
2) To finance its activities so as to give it solvent.
In order to do this, a balance sheet is important. A balance sheet is a statement of affairs
at one point in time from which the financial state of the farm can be diagnosed by
simply calculating the farm’s net assets (possessions) and the debts or the liabilities and
how these assets have been founded.

A balance sheet can be drawn anytime but usually at the end of the trading period. To
draw the balance sheet the required information e.g.
1) How much the business owes others
2) How much is it owed by others
3) What is the amount of cash in the bank and
4) The amount of cash in hand
5) How much outstanding loans and any other Asset value or liability

NB: Therefore, a balance’s basic features are the sources of the capital for the business
on one hand and its investment in assets on the other. In short, it summarizes what the
business owes others businesses or individuals (liabilities) and what it uses (assets).
Therefore, the balance sheet will indicate the net capital or the net worth of the business
hence indicating whether it is solvent or insolvent (L>A).
It is therefore important to know what financial means will enable the farmer to own the
resources that will be used as a factor of production. This can only be done if we have
good information from the records about the available resources and then developing a
balance sheet. The possessions are called assets and the debts are called liabilities. The
balance sheet must always balance as the name implies. When listing down the
possessions or assets, there is a sequence, which needs to be followed. We start with:
The most fixed assets e.g. land, building,
Then to the more current assets and
Finish with the liquid assets e.g. cash/money in hand or bank.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
It is very important to separate your properties from those of the farm business.
The total assets can also be referred to as the gross capital, which will be equal to the
value of all the assets.
A balance sheet can be prepared at any time but usually it is done after one year. Balance
sheet, which is prepared at the end of the accounting period, is referred to as a closing
balance sheet while that one made at the beginning of the year is referred to as the
opening balance sheet.
A balance sheet made on the 1st of Jan. 2001 is the opening balance sheet for 2001
business period, while the balance sheet drawn on the 31st of December 2001 is the
closing balance sheet for the trading account period 2001. Therefore, the closing balance
sheet as at 31st Dec. 2001 will be the opening balance sheet for the trading period starting
on 1st Jan. 2002.

Functions of a balance sheet

1) To indicate the net capital or net worth of a business on a given date.
2) To show the distribution of the net worth in the business
3) It can show the present financial liquidity or solvency of a business at
a given date i.e. whether it can pay its cash debts from the liquid
assets.
4) It shows the accumulated and distributed profit or loss
5) To show the financial structure of a business in a clear concise
statement giving any interested person a summary of the state of the
whole farm business.

FORMAT OF A BALANCE SHEET

LABILITIES ASSETS
KS CT KS CT
. H S H S

FIXED/DEFERRED 4.FIXED CAPITAL

LIABILITIES - - ASSETS

1. Long term Land

Liabilities - - Farm buildings

Houses
Fixed Equipment
- -
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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 - -

- -
2.CURRENT/SHORT
TERM LIABILITIES 5.CURRENT/FLOAT
ASSETS
Short term loans - Livestock for sale -
- -
Sundry creditors- Sundry debtors
- - -

3.LIQUID 6.LIQUID/QUICK
LIABILITIES ASSETS
Bank overdrafts - Cash in hand & bank -
- -
Unpaid taxes - - Produce in store
- -

Capital gain - - Balance Net

TOTAL - - TOTAL

Example 1: -
The technology farm had the following data during the 31st of December 2001.
Long-term loan 200,000 Equipment 250,000
Lorry 350,000 Bank Overdraft 80,000
Pick Up 150,000 18 cows for breeding @ 18,000
Tractor 400,000 Cash in hand 15,000
Outstanding bill from 50,000 Cash in bank 20,000
KFA
Building 500,000 20 cows for sale @ 15,000
15 sows for sale @ 4,000

Using the information, prepare the balance sheet for technology farm.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Solution
TECHNOLOGY FARM
BALANCE SHEET
AS AT 31ST DEC. 2001

LIABILITIES KSH CTS ASSETS KSH CTS

1. 4.FIXED CAPITAL
FIXED/DEFERRED ASSETS 500,000 00
LIABILITIES 200,000 00 Buildings 250,000 00
Long term loan Equipment

SHORT
TERM/CURRENT 5. CURRENT ASSETS
LIABILITIES 50,000 00 Breeding cows (18) 324,000 00
Outstanding bill Lorry 350,000 00
Pick Up 150,000 00
Tractor 400,000 00
20 Cows for sale 300,000 00
15 sows for sale 60,000 00

3.LIQUID LIQUID ASSETS

LIABILITIES 80,000 00 Cash in bank 20,000 00
Bank overdraft Cash in hand 15,000 00

(NET CAPITAL 2,039,000 00

GAIN)
TOTAL 2,369,000 00 TOTAL ASSETS 2,369,00 00
0

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
EXAMPLE 1
1. What is a balance sheet?
b) Use the following information to prepare a balance sheet for ABELI farm for the
year ending 31st December 2004.
The farm obtained on credit a tonne of manure at sh300, two 50 kg bags of diammonium
phosphate fertilizer at shs296 each and livestock feed for sh2800. The farm is yet to pay
sh800 as wages for casual workers and sh500 as interests on loan. It has a bank loan of
shs.20000. The debtors of the farm are KCC sh3600 for milk delivered; Technology farm
sh8000 for a heifer sold, and shs.600 for hay sold; National cereals and produce board
shs.6000 for maize delivered; co-operative society sh5000 for beans delivered.
The assets on the farm include inputs in store worth shs.500; dairy animals worth
shs.26000; farm buildings worth shs.75000, tools and equipment worth shs.15000, land
shs.120000.
The farm’s bank account has shs.1500 and there is shs.600 in the cash box in the farm’s
office.
c) Is the business solvent or insolvent?
d) Calculate the working capital
e) State the balance sheet equation
ABELI FARM
Balance sheet
as at 31st December 2004
LIABILITIES ASSETS
SH/CTS SH/CTS
Fixed assets
Land 120,000.00
Long term liabilities Farm building 75,000.00
Bank loan 20,000.00 Tools and equip 15,000.00
Total long term 20,000.00 Total assets 210,000.00
liabilities

Current liabilities Current assets

Loan 500.00 Animal feeds 26,000.00
interest 800.00 Inputs in store 500.00
Casual 3,692.00 Debts receivable 23,200.00
labour 4,992.00 Cash at bank 1,500.00
Debts payable 24,992.00 Cash at hand 600.00
Total current
liabilities
Total liabilities

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 Total current assets 51,800.00

Net worth 236,808.00

Total 261,800.00 Total assets 261,800.00

MANURE 300.00
FERTILIZER 592.00
LIVESTOCK FEEDS 2,800.00
TOTAL DEBT 3,692.00
PAYABLE
HEIFER 8,000.00
HAY 600.00
MAIZE NCPB 6,000.00
BEANS NCPB 5,000.00
TOTAL DEBTS 23,200.00
RECEIVABLE
Working capital
This is excess of current assets over current liabilities
I.e. sh51, 800 – sh4992 = sh46, 808
Balance sheet equation I.e. capital = asset – liabilities

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Terms used with balance sheet
1) Net capital ratio: This is the ratio between assets and liabilities. It shows
by how much assets value exceed the liabilities. a net capital ratio of one
indicates that assets = liabilities and net worth( capital) of zero
2) Ultimate solvency: This means that the total resources are equal to or
greater than total amount of liability. Net worth> 0 when the business is
solvent. When the resources of the business do not cover the total liability
we say that the business is insolvent or bankrupt.
3) Debt equity ratio (DER): DER is another measure of solvency, which
shows the relationship of owned capita to borrowed capital
DER= TOTAL LIABILITY
OWNER’S EQUITY
The interest of the business is to have as low DER as possible as possible.
4) Current ratio (CR): The current ratio is a measure of the liquidity of the
business and shows the relationship between current assets and current
liability (It is a critical ratio in business)

CR = CURRENT ASSETS
CURRENT LIABILITIES
NB CR expectation of the business should be as large as possible. Current assets are
items, which are used in production within the year of the business. Current liabilities are
all cash obligations due within the year of the business operation .the current ratio is a
measure of the business to generate cash within the business year so as to meet cash
payments or debts and other current liabilities. CR is important in the business because a
business may be solvent as measured by the net capital ratio but still have difficult
generating the cash need to meet the current liabilities (current obligations)

5) . AVERAGE STOCK = OPENING STOCK+ CLOSING STOCK

2

6) SALES TURN OVER= SALES

NET SALES
7) DEBTORS TURN OVER = SALES
DEBTORS
Note 1.Fixed costs: are as result of fixed resources like land, buildings and fixtures
(dams, wells, and water supply equipments
2. Intermediate cost: these are costs such as machinery equipment, breeding stock.
They are movable but can take a long time to turn them to liquid money.
3.Current cost: also called short run costs ie costs of all inputs that are variable e.g.
seeds fertilizers, fuel, herbicides, and hired labour

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Example 2 :
Prepare a balance sheet from the following information for Nagritech farm for 31st
December 2003.
The farm owes 2,000 for fertilizer from KFA, sh.350 for feed from Unga Ltd and
borrowed from Co-operative bank sh.35, 000, which was still outstanding at the time of
making the balance sheet. The money was to be paid within five years. At the time the
balance sheet was being made, the farm had sh.3, 500 cash in bank and owed sh.1,700 for
wood sold to KFA. The valuation was as follows:

Sheep 12,000 Maize in store 15,000 Coffee bean 3,000

Cattle 35,000 Coffee 60,000 Cattle salt 700
Plantation
Equipment 20,000 Goats 5,000 Lambs for 9,000
sale
Buildings 4,000 Wool 11,000 Steers for 20,000
sale

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
NAGRITECH FARM
BALANCE SHEET
AS AT 31ST DECEMBER 2003
LIABILITES KSH. C ASSETS KSHS C
T TS
FIXED LIABILITES FIXED ASSETS
- - Buildings 4,000 00
Equipment 20,000 00
CURRENT 35,000 CURRENT ASSETS
LIABILITIES 00 Sheep 12,000 00
Co-operative loan 2,000 00 Cattle 35,000 00
Credit for fertilizer 00 Goats 5,000 00
Credit for feeds 350 Wool 11,000 00
Coffee bean plantation 60,000 00
Cattle salt 700 00
Lambs for sale 9,000 00
Steers for sale 20,000 00
Coffee bean 3,000 00
KFA debtors for wood 1,700 00
LIQUID -- -- LIQUID ASSETS
LIABILITIES Maize in store 15,000 00
Cash in bank 3,500 00
Balance Net capital 162,550 00
gain (Net worth)
TOTAL 199,900 TOTAL 199,900 00
Net capital ratio= Assets/liabilities
=199,900/37,350=5.35
Debt equity ratio (DER)
DER= TOTAL LIABILITY
OWNER’S EQUITY
=37,350 /162,550 =0.23
Current ratio (CR)
CR = CURRENT ASSET
CURRENT LIABILITIES
=175,900/37350 = 4.7
Acid test- liquidity ratio (AT-LR)
(AT-LR) = (current assets-stock): current liabilities
= (Current assets-stock)
Current liabilities

= (175,900-15,000) /37,350 = 4.3

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Profit and Loss Accounts
The profit and loss account is a financial statement showing whether the business I made
a profit or a loss. It shows the expenses incurred and the sales made during the account
period, usually one year. It also shows the closing and opening valuation as well as the
debt payable and debts receivable during the accounting year.
In drawing a profit and loss account, all the expenses; purchases, debts payable and
opening valuation are put on the left hand side of the page of the account columns and the
debts receivable, sales and receipts and closing valuation on the right hand.
It should be noted that when drawing a profit and loss account, the closing valuation of
the previous accounting period becomes the opening valuation of the current account
period.

If the sum of the opening valuation, purchases and expenses as well as debts payable is
greater than the sum of the closing valuation, sales and receipts and debts receivables,
then the business has made a loss.
On the other hand if the sum of the opening valuation, purchases, expenses and debts
payable is less than that of the closing valuation, sales and debts receivable, the business
has made a profit
(Closing valuation + sales and receipts) - (opening valuation + purchases and
expenses) =Net profit
At the end of every financial year, the manager uses the information from the valuation
books to list the opening and closing creditors and debtors. He also uses the cash
analysis book to obtain the financial results of the year’s trading.
NB/ profit and loss account and balance sheet are known as the financial statements.
These are highly important because the main aim of running a business is to run it
profitably and finance its activities so that it stays solvent. Profit and loss account is
simply a summary of sales and receipts i.e. income or output less payments or expenses
(expenditure).
A profit and loss account is a profitability statement showing the profit or loss resulting
from a business activity over a fixed time period, and vice versa. Therefore, a profit and
loss account can be used to find the profit or loss either for the whole farm or an
individual enterprise. This account gives a picture of the business and sometimes
referred to as a moving picture of the farm business production.

The time period for preparing profit and loss account is decided by the farmer or the farm
manager himself. However, usually the calendar year is followed i.e. January, -
December. In the Government organizations, the trading account starts from 1 st July and
ends 30th June the following year covering 12 months period. They are therefore
considered along with the government yearly financial budget, which is usually prepared
by the month of June.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
The Layout of the Farm Trading Account
The basic layout of the farm trading account covers few important sections namely: -
1) Opening valuation: e.g. cattle, sheep, goats, poultry etc i.e. the
production livestock and trading livestock. The crops e.g. tea, coffee,
cassava etc. The vehicles Stock at hand. Buildings, fences etc.
Therefore assets on the farm at the beginning of the year or trading
period must be put down.
2) The items of actual expenditure in the farm business during the year.
e.g. Salaries and wages, Seed and fertilizer, Stock feeds, Chemicals
etc.
3) The sum of revenue i.e. receipts, which are received by the farm
business during the trading period or the year. For example: Milk
sales , Crop sales , Capital sales etc.
In this section, non-cash receipt e.g. rental value, produce
consumed by family. Private use of car, telephone should be included.

Closing valuation at the end of the year of the same items and others as in the opening
valuation e.g. crops, livestock, vehicles, stock at hand etc.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
FORMAT OF A PROFIT AND LOSS ACCOUNT

PAYMENTS AND EXPNSES RECEIPTS AND SALES

INPUTS OUTPUTS
1. OPENING VALUATION 3. RECEIPTS AND SALES
Buildings, fences, livestock, vehicles, crops,
equipment, stock in hand, fuel, oil etc. - Farm produce
2. EXPENDITURE - Sales of culled animals
- Livestock purchases - Capital sales etc.
- Feed stuffs 4. NON CASH RECEIPTS
- Salaries and wages - Rental value of house
- Repair - Produce consumed by family
- Chemicals - Private use e.g. car.
- Fuel and oil 5. CLOSING VALUATION
- Interests - Buildings, fences, vehicles, trading livestock,
- Capital expenses etc. productive livestock in hand etc.
Balance (Profit) Balance (Loss)
Balance the totals Balance the totals

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Example 1:
(a) What is the use of a profit and loss account to the farmer?
(b) Prepare a profit and loss account for Technology Farm for the year ending
December 2004 using the following information:
The farm manager made the following purchases during the year: seeds and fertilizers
for sh1800, disc plough for sh30000, fuel for sh1000, and feeds sh1500.
During the year the farm sold maize to KFA for sh10000, potatoes to a neighboring
school for sh2700, and milk to KCC for sh5000. The farm also expected sh2000 from
Abeli Farm as payment for ploughing the land. The opening valuation was sh40000 and
the closing sh60000.
(c) Did the farm make a profit or a loss?
(d) What was the percentage profit or loss made by the farm?

PROFIT AND LOSS ACCOUNT OF TECHNOLOGY FARMFOR THE YEAR

ENDED 31ST DECEMBER 2004
PURCHASES AND EXPENSES SALES AND RECEIPTS

Sh Ct Sh Ct
Opening valuation 40,000 00 Maize 10,000 00
Seeds and fertilizer 1,800 00 Potatoes 2,700 00
Disk plough 30,000 00 Milk 5000 00
Fuel 1,000 00 Debts receivable 2,000 00
Feeds 1,500 00 Closing valuation 60,000 00
Total 74,300 00

Profit 5,400 00
TOTAL 79,700 00 79,700 00

% Profit =profit
Opening valuation
=5400
40000
=13.5%

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
An Example2:
The following information was available from the technology farm for the financial year
ending 31st Dec. 2001. Using the information, prepare a profit and loss account
Cattle 300,000 Milk sales 120,000
Goats 80,000 Cull cow 40,000
sales
Stored produce 400,000 Food crop 200,000
sales
Equip & Machinery 800,000 Stored 500,000
produce
Concentrates 60,000 Cattle 400,000
Depreciation of 30,000 Goats 90,000
machine
Depreciation of 10,000 Equipment 300,000
equipment
Cash for sale 600,000 Machinery 900,000

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
PROFIT AND LOSS ACCOUNT OF TECHNOLOGY FARM FOR THE
FINANCIAL YEAR ENDING 31ST DECEMBR 2003

PAYMENTS AND EXPENSES RECEIPTS AND SALES

INPUTS KSH. CTS OUTPUT KSH. CTS
1 OPENING 3. RECEIPTS &
VALUATION SALES
Cattle 300,000 00 Cash for sale 600,000 00
Goats 80,000 00 Milk Sales 120,000 00
Stored produce 400,000 00 Cow sales 40,000 00
Equipment & 800,000 00 Food crop sales 200,000 00
Machinery
2 EXPENDITURE 4.CLOSING
VALUATIONS
Concentrates 60,000 00 Stored produce 500,000 00
Veterinary Services 20,000 00 Cattle 400,000 00
Dairy expenses 20,000 00 Goats 90,000 00
Wages 100,000 00 Equipment 300,000 00
Interest on loan 50,000 00 Machinery 900,000 00
Depreciation of 30,000 00
machines 10,000 00
Depreciation of
equipment
TOTAL 1,870,00 00
0
Balance Profit 1,280,00
0
TOTAL 3,150,00 00 TOTAL 3,150,00 00
0 0

% Profit= 1,280,000/1,580,000 =81. 01%

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Financial accounting document
(Business document)
Commercial farming involves many activities. Commercial transaction is the main
activity. Transaction is any dealing between two parties that involves goods or services
from one of them to other for consideration. Many farm decisions are technical ones but
most of them have financial effect.
Therefore one of the most useful tools available to any business manger seeking optimum
use of all resources available is a well presented or a well-kept set of accounting
documents
Types of business documents:
This include the following:
1) Notebook
2) Cash receipts
3) Invoice
4) Statements
5) Purchase orders
6) Delivery note
7) Cheques
8) Money orders
9) Telegraphic money orders
10) Postal order
11) Postage stamps
12) Registered posts
13) M-Pesa (i.e. using mobile phones)
14) Posta pay
15) M- Shwari

1) Notebook: This is a field book usually carried by the farmer/manager

or field officer as he/she goes around the farm to record details for
farm operation, broken fences, dead chicks, cow on heat, cows sold,
chicks vaccinated, feeds delivered, casual labour in the field for
cleaning, weeding etc. Such records/details may be entered in a day-
to-day basis and thereafter referred to as farm dairy.
2) Cash receipts: Most transaction between wholesalers and retailers are
credit transaction and of those between retailer and consumers are cash
transactions. Most small-scale farmers sell or buy on cash terms and
paying in cash is by far the most common method of settling debts.
Therefore when a good (merchandise) in bought and paid for in cash,
it is called a cash sale and a cash receipt is issued. The receipt book in
printed in duplicates the original receipt is given to the buyer;
Essential details in the cash receipts are as follows.
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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 a) Date of transaction.
b) People/ institution/ organisation
c) Amount of money involved.
d) Account entry of that particular transaction.
These details are later entered in a cash analysis book. If the amount of money involved
is more than 40kshs then a government revenue stamp is fixed on the receipt. The
signature of the person issuing receipt should cover the stamp as well ie when the stamp
is already fixed on the receipt normally on the right hand bottom corner of the receipt.

3) Invoice: Whenever merchandise e.g. farm produce is sold on credit an

invoice is made out in an invoice book. Invoice is normally written in
triplicate. The original is given to the buyer (debtor) together with the
goods. The duplicate is sent together with the statement to the buyer at
the end of the month. The triplicate remains in the invoice book as a
record for reference. The buyer should keep the original invoice (s)
safely in order to countercheck with statement send at the end of the
month. An invoice would contain some of the details shown below:
a) Date the goods were carried way.
b) People/ institution / organisation involved.
c) Amount of money i.e. price unit.
d) Amount of items and brief explanation of them.
e) Reference to the delivery note.
f) Length of the credit period allowed.
g) Cash discount offered.

4) Statements: If the number of transaction between two parties is

substantial, then the seller or manufacturer may provide an extra
service to the buyer. Hence at the end of the month, all the invoices of
every customer are summarised in separate statements, which are, send
to the customer (buyers) for payments. The date on the statements is
the last day of the month in question /concern. The statements gives
the date of the invoices, their particular numbers with or without
details, the amount under the heading debit. If during that month any
payment or merchandise is received from that customer, it will be
accounted for under heading credit.
In short monthly statement includes some of the following;
a) Total value of credit notes issued during the month
b) Total remittances received during the month.
c) Amount due at the end of the month.
The between debit and credit is entered under the following heading balance.
The final balance is the amount due for the payment

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 5) Purchase order: The purchase order is a written request to trading
business to supply specified merchandise (goods) on credit warranting
payment presented with the invoices. The farmer (especially the small
scale farmers) may not use it, but in government or organisations like
the universities, sugar companies, use of purchase orders is rather
indispensable means of control on expenses. It is commonly called
local purchase order L.P.O. The L.P.O. specifies the item in numbers,
Date, Size, Make, Colour, (if any) Amount of money involved, The
people or organisation involved in the transaction. The L.P.O. needs
the signature of the person who ordered and who approves the
purchase i.e. the person who approves is the AIE holder (Authority to
incur expenditure)
6) DELIVERY NOTE: Goods may be delivered by the seller or
collected by the buyer in his own vehicle or transported through a
public carrier I.e. a company which undertakes to transport goods for
other firms for a charge. To evidence the delivery of goods that are
physical transfer of goods, from the seller to the buyer, a delivery note
is prepared by the farmer (the seller) and signed by the latter (buyer)
A clearly written delivery note may include the brief details of goods as follows:
a) Date of transaction
b) Quantity and quality of goods
c) Name of people or organisation involved
d) Size of packets, cases etc.

7) CHEQUES: A cheque is an order to the bank to make or effect

payment of money. It is an easy way of making payments of debts or
purchases by a person or business having an account. Two kinds of
bank accounts namely current account, and deposit (savings) account
are the most common and important ones to a small-scale farmer or
businessman.
Details on the cheque should include:
a) Date
b) Name of the drawer/or his signature
c) Name of the payee
d) Amount of money involved etc.

NB/ The cheque drawn on and paid into a person’s account is

recorded on the bank statement normally at the end of each month.
A cheque can be open or crossed. An open cheque can be cashed
whether one has got a bank account or not. Therefore it is not a

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 safe cheque. Crossed cheques on which two parallel lines are
drawn up and down it. A crossed cheque cannot be cashed straight
away on the counter. It must be cleared and deposited in the payee
account. The crossing is just a matter of precautions or safety to
prevent abuse by anybody cashing the cheque.
Advantages of paying by a cheque
a) It is convenient, it is easy to write a cheque other than
counting notes and coins
b) It is safe to pay by cheque since cash can be stolen
A cancelled cheque (i.e. cheque against which a payment has been made) is an evidence
of payment in itself. In case of any proof needed the bank can produce it.
Dishonouring a cheque
In some circumstances a cheque may be dishonoured by a bank i.e. refuse payment
against it. A cheque may be dishonoured if:
a) The drawer does not have sufficient fund in his account
with the bank in question
b) The drawer is dead or has become bankrupt
c) The drawer has instructed the bank not to honour the
cheque
d) The cheque is stale i.e. presented six months after the
date on the cheque
e) The cheque has errors e.g. amount in word and in figure
differ
f) The cheque is presented before the date on it . Such a
cheque is called post dated cheque
g) The drawer has closed his account with the bank in
question
h) The cheque is not signed by the drawer or if the
signature differs with the specimen held by the bank
Books of account
1) Ledger: Aledger is a book where final accounts are kept and it can be
used to arrive at a balance sheet. It can show a prtofit or loss. The
information contained in a ledger is transferred from the primary
books of account. A ledger account has two sides, the debit side (DR)
on the left hand side(assets or receipts side) and the credit side (CR.)
on the right hand side( liabilities or payments records). The types of
ledgers are
a) Sales ledger
b) General ledger which is for all aspects of account
c) Purchase ledger

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 d) Private ledger that usually contains details of secret
records
2) Journal: The journal is a book of account of original entry where all
entries are recorded from day to day. All the non cash transactions are
entered in it and later transferred to the ledger
3) Inventory: The inventory usually gives the record of allthe assents
and valuing of the farm property. Each farm property is listed and its
description made. Rented or borrowed property and money being used
in the farm is also counted.
4) Cash book. The cash book is a book of accounts in which all the cash
transactions in the farm are recorded.it consists of the cash account and
the bankaccount.It has the debit side where all the receipts are
recorded, and the credit side where the cash payments are recorded.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Inventory, Valuation and Depreciation

A INVENTORY
In commercial farming just like any other business organisation, keeping an accurate
inventory (listing) of crops and livestock is very essential i.e. the list of all the
possessions of the farm item by item.
The dead stock is very important and consists of all the assets or capital other than
growing crops and animals. Examples of dead stock includes
Buildings
Machinery e.g. tractors, milking machines, cars etc
Inputs e.g. seeds, fertilizers chemicals etc.
Products in the store e.g. maize, wheat, barley etc.
An inventory involves physical measurements and counting of assets commonly referred
to as stocktaking and doing their valuation, it needs the farmer to walk around the farm,
check the stock etc. and listing all the assets in details. The listing / recording should be
done under suitable heading in the valuation book. This record should be full and should
also include what he owes others (creditors), and what he is owed by others, (debtors). In
summary the following needs listing:
Fixed and part fixed capita assets e.g. land and housing ‘ buildings, improvement
(permanent), machinery
Purchases in store e.g. fertilizer, seeds, pesticides, etc.
Harvested produce e.g. maize, beans, rice, wheat etc.
Fodder crops e.g. Napier, grass
Growing crops e.g. tea bananas pyrethrum etc.
Livestock e.g. beef, dairy, poultry etc.

B) VALUATION
This means determining the worth and` the value of the business.
Assets. In agricultural production, we consider annual valuations for an important
accounting concept. Assets are valued when bookkeeping is first began and at the end of
each year. After listing all the assets (inventory) the farmer should value them himself all
pass the list to a professional valuer for valuation. If a professional valuer is used, he
must be informed of the farmer’s objectives and policy. In making the valuation the value
of the asset should be based on either its:
Cost value, this shows the total sum of money put in business investment and has a
disadvantage in that items may appreciate or depreciate in value or inflation ie price
change
Market price or valuation which ever is low.

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 GUIDELINES OF VALUATION
Land ---is said not to loose value under good management and may keep or appreciate in
value. However the value of the similar land in the same area at the present time.
Buildings –
- Permanent buildings –these buildings last between 25 to 40 years (their
economic life span)
---Depreciation rate is 4-2.5% per annum
Wooden buildings and other buildings not of stone: last for about 10years: depreciation
rate is: 10% per annum
(c) Machinery
Are also referred to as indivisible resources.
Are classified in to two: non-motorised e.g. ploughs etc. This depreciates at a rate of
10%.
Motorised---e.g. Tractors cars etc. depreciate at rate of 20% per year
Note small tools like jembes spanners, hammers, saws shovels etc. are written off after
one year i.e. depreciation is 100% per year. However in some cases they are valued
(d) Livestock
The value of animals increases initially then stays constant and finally decreases in value.
Therefore to calculate the value of livestock by depreciation is ruled out. Cattle and other
livestock should be listed by size, sex, and kind, and then divided into indigenous, mixed,
grade and pure breed. Each further subdivided into their respective sex etc. Factors
known as livestock units or (LU) or livestock equivalents are used to convert all classes
of livestock into common units an example is as follows:

TYPE OF LIVESTOCK TYPE OF LIVESTOCK

LIVESTOCK UNITS LIVESTOCK UNITS
Bulls 1.0 Other cattle below 0.3
one year
Dairy cows 1.0 Ewes (lambs and 0.2
0.8 rams)
Beef Fattening sheep 0.2
Other cattle over 0.8 Goats 0.2
2yrs
Other cattle between 0.7
1- 2yrs

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Example:
A farmer has got the following livestock in his farm
10 bulls 70 ewes
40 dairy cows 15 cattle under one
year
30 cows over 2yrs 20 fattening sheep
10 cattle between 1- 30 goats
2 yrs
Find the number of livestock units for each class of livestock (Answer total of lu is 125.5
lu)
Calculate the stocking rate if the farmer has 100 ha. The recommended stocking rate is
1lu per ha. (Answer 100/125.5 x1Ha. =0.8)

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DEPRECIATION
Depreciation is at that part of the cost of the fixed assets consumed during its period of
use in the firm. In other words depreciation is the reduction in value of a fixed asset. One
objective of depreciation is to provide for replacement. Depreciation is a charge against
the profits. Deterioration of the assets through constants use leads to a fall in the
monetary value of the assets. Depreciation is the writing off the cost of fixed or part fixed
cost assets which are expected to last more than one year. It is a financial estimate of the
annual loss of value always referred to as capital or investment and it covers the loss of
value of an asset with age. The depreciation charge in financial accounts is therefore a
simple book entry representing the spreading of the cost of an asset over its economic
working life. This is because capital goods or production goods are usually used up or
destroyed and they must usually be replaced. It is convenient to think of this cost as a
series of annual cost equal to the total working life expenses. This imaginary annual
replacement cost is called depreciation. Therefore depreciation always keeps withdrawing
funds from the business. This fund however can be used elsewhere. It should be
remembered that not all the assets depreciate in value eg land usually appreciate in value
if properly managed.
CAUSES OF DEPRECIATION
There are three main reasons for depreciation, which are
-Tear and wear
-Obsolescence (becoming out of date)
-Time (age) this is for the assent with fixed period of life such as leases, patents and
copy-rights
Others are:
-Inadequacy and superfluity (termination of the use of the asset because of the growth
and changes in the size of a firm)
- Depletion
1. Tear and wear
This refers to the physical loss of value as we use the asset and the running maintenance
which does not keep the asset in its new condition. It is this loss of value caused by
ordinary use, which is different from the damage resulting from carelessness or accident.
Wear and tear is usually the most important aspect of machinery depreciation on large
commercial farms where machinery is used intensively and extensively and this tends to
limit the machinery economic life stay in hours. Assets will have some of their parts
wearing away or even tearing of due to reasons such as:
-Friction (engine with rotating parts will wear away due to friction) e.g. motor vehicle
tyres wear due to friction
- Exposure to natural factors e.g. rain, sun heat and wind may cause assets to erode,
rust or rot..
2. Obsolescence

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 Obsolescence means ‘ becoming out of date’. This is the end of assets life for reasons
other than the loss of value. Therefore an asset is obsolete when its going out of use but it
is not yet completely unuseful. It is scraped because it has become outdated and needs a
replacement with a more efficient model. Obsolescence comes as a result of invention of
new, cheaper and more efficient asset. It can also come as a result of change in fashions
and changes in tastes of consumers; this will make a machine to be scraped when it is in
good condition. Also the item held in stock may become outdated and of no further use
e.g. the spare parts of a scraped machine. E.g.
-Due to the invention of electric recorders, the manual gramophones became outdated.
-Computers in many firms have replaced the typewriters
-The manual winding watches have been replaced by electric (digital) and automatic
watches.
-Steam locomotive engines in rail transport have been replaced with diesel and petrol
engines
3 .Age/ time
This is simply loss of value over time as the machine is being used. This process can be
increased due to corrosions, or poor storage (housing) of the asset. Age and obsolescence
are the major cause of building depreciation but they also tend to limit the life of
machinery. However, there are some assets that have a fixed legal time of life. These
assets depreciate strictly on time basis whether they are used or not. A sh50, 000 lease
entered for 10 years, for example, depreciate at a constant rate of sh.5, 000 per year.
Other examples of assets that depend on time include: patents and copyrights.
Others:
-Inadequacy and superfluity
As a business expands, its activities increase. It is however not possible to expand some
assets proportionally to cope with the increased activities. These assets hence become
inadequate relative to the requirements of the business. For instance if a firm has a
minibus which carries 20 workers, if the business expands such that the minibus becomes
too small (inadequate) the firm will buy a bus which can carry about 70 workers. The
minibus will have lost value due to what is called inadequacy.
On the other hand some assets may become so superfluous to the needs of the business
due to reasons such as decrease in business activities or a change in the line of business.
These assets become less valuable due to superfluity. For example a company that deals
with bulky goods like storage of maize, needs a big warehouse, however if such a firm
changes the business to an other business which requires less space e.g. dealing with
jewellery. These warehouses will become superfluous when the business changes.
- Depletion
Some other types of assets lose value due to extraction such that less quantities are left
after each extraction e.g. in mines and quarries.

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METHODS OF CALCULATING DEPRECIATION
There are several methods of calculating depreciation but whatever method is used the
main aim is to find out a realistic market value of the asset. Therefore depreciation can
further be defined as the loss of market value over a period of time usually one year. The
main methods used in calculating depreciation are as follows:
The straight line or fixed instalment method
The reducing or declining or diminishing balance method or declining depreciation
method (D.D.M)
The sum of the year digits method
Revaluation.
The annual method
The use adjusted method

1. Straight-line method (S.L.M)

In this method, depreciation is calculated as follows:

Depreciation per year = loss of value of the asset

Estimated useful life span in years

Loss of value of the asset = cost of the asset – estimated residue value at the end of
the economical period
In this method depreciation is written off in equal annual instalments that are included as
an expense in the profit and loss account .The estimated residue value (salvage or scrap)
value of the asset is deducted from the original cost and the balance is divided by the
estimated or the expected useful life span. This method is simple easy to work and
therefore favoured by the accountants. The only disadvantage is the cost of repairs keep
on increasing whereas the depreciation rate is constant. It is commonly used for the
durable assets e.g. fences, building etc that need the same maintenance throughout their
life span. When straight method is used it is assumed that the asst depreciates evenly
throughout its useful lifetime such that equal amounts are provided for at the end of each
accounting period the number of years of expected useful life and the salvage value are
first estimated. The difference between the cost and the salvage value represents the total
amount of depreciation. Depreciation per year is therefore total depreciation divided by
the number of years of the expected use. Straight-line method is so called because if a
graph of value versus years is drawn, a straight line results.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Graphical explanation of straight-line depreciation

Book value

Period
Formula
D=O.V – S.V
Time
Where: D= Depreciation
O.V= original value
S.V= Salvage value (residue, scrap value)
Time =Expected years of useful life of the asset
Example:
A tractor worth sh960, 000 has got a salvage value of sh150, 000 and its useful life span
is estimated at 10 years. Find the rate of annual depreciation in terms of:
Money
Percentage
Solution:
a) D = O.V – S.V
Time
D = 960,000 –150,000
10
Depreciation is = sh81, 000 per year

b) Depreciation % =81,000x100
960,000
=8.4%

Straight-line method is commonly used because of its simplicity. It has however some
drawbacks. It assumes that the asset can depreciate to zero, which is not true for many
assets. It also does not consider the effects of repairs and maintenance since a fixed
percentage is applied on the original cost of the asset and not on the current value.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
2. The reducing or declining or diminishing balance method or declining
depreciation method (D.D.M)
This is a method of calculating depreciation by taking a constant % each year over the
useful life of the assets or machine. The annual depreciation reduces as the machine/
asset ages. No salvage value is considered but at least there is some remnant value at the
end and therefore the asset stays in book until it is scraped off or sold. Reducing balance
method gives a more even combined annual depreciation charge against profit by making
smaller depreciation charges in later years when the repairs and maintenance cost are
likely high. This method is the one allowed by the income tax authorities in most
countries e.g. for vehicles and machinery which lose value faster in the early years of
their life.
If a graph of values versus the years is drawn, a smooth curve results. The curve tend
towards the x axis (years) but would never touch it.

Book value

Period in years

Annual depreciation = % depreciation x original value

100

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Example: A planter is worth sh200,000, its annual depreciation is 20% and a useful
life is estimated at 10 yrs. Calculate the rate of depreciation for each year and find
the remnant value or final book value.
Solution

YEAR VALUE AT THE VALUE OF BOOK VALUE

START OF THE ANNUAL OR REMINANT
YEAR DEPRECIATION VALUE
st
1 200,000 20% x 200,000= 200,000 – 40,000=
40,000 160,000
nd
2 160,000 20% x 160,000 160,000-32,000
=32,000 =128,000
rd
3 128,000 25,600 102,400
th
4 102,400 20,480 81,920
th
5 81,920 16,384 65,536
th
6 65,536 13,107.2 52,428.8
th
7 52,428.8 10,485.76 41,943.04
th
8 41,943.04 8,388.608 33,554.32
th
9 33,554.43 6,710.886 26,843.5
th
10 26,843.5 5,368.7 21,474.8
The balance of the asset keeps on reducing and hence the name of this method. The asset
will however, never depreciate to zero. Secondly this method unlike the straight line
method, considers the effects of repairs and maintenance since the application of
percentage is on the balance (book value)

3.Sum of the year digit method (S.D.M)

In this method annual depreciation is calculated as a fraction that drops each year so that
the total depreciation is purely covered during the assets useful life period. This is a
numerical method of depreciation but it has one major similarity with the reducing
balance method in that both are accelerated depreciation method s charging larger
depreciations in early years of the useful life of the asset and gradually smaller
depreciation expenses in the later years
The annual depreciation is determined by multiplying the fraction times the difference
between the original value and salvage value of the asset
I.e. Fraction x (O.V - S.V). The fraction for any year is determined as follows
Denominator = Sum of digits of the years of life period of the asset. Therefore if the life
span of the asset is 10 years, then the denominator will be determined as follows:
D= 1+2+3+4+5+6+7+8+9+10= 55

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
The numerator of the fraction is the year of the life remaining at the beginning of the life
remaining at the beginning of the accounting period. E.g. the fractions for the first year of
an asset of 10 year of 10 years life period could be as follows:
1st 10/55 2nd 9/55 3rd 8/55……… last will be 1/55
The depreciation figure obtained is deducted from the value of the item at the beginning
of the accounting year.

Example1: A tractor worth sh650, 000 and its life period is 10 years, with a salvage
value of sh50, 000. Calculate the value of annual depreciation for the whole life
period using the sum of the digit method.
Solution

Depreciation cost of the tractor =cost of tractor - residue value

650,000 – 50,000 = sh600,000
YEAR VALUE AT THE VALUE OF ANNUAL BOOK VALUE
STRAT OF THE DEPRECIATION
YEAR
st
1 650,000 600,000X10/55 650,000-109,090.91= 540,909.09
=109,090.91
nd
2 540,909.09 600,000X9/55 540,909.09 -98,181.82=442,727.28
=98,181.82
rd
3 442,727.28 600,000X8/55 442,727.28-87,272.73= 355,454.55
=87,272.73
th
4 355,454.55 600,000X7/55 279,090.92
=76,363.64
5th 279,090.92 600,000X6/55 213,636.37
=65,454.55
th
6 213,636.37 600,000X5/55 159,090.91
=54,545.45
th
7 159,090.91 600,000X4/55 115,454.55
=43,636.36
th
8 115,454.55 600,000X3/55 82,727.28
=32,727.27
th
9 82,727.28 600,000X2/55 60,909.10
=21,818.18
th
10 60,909.10 600,000X1/55 50,000
=10,909.09
Note the salvage value is sh50, 000 which should be the value at the end of the life span in
this case the value at the end of the tenth year

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 1
Example2: A company buys a car at a price of sh221, 000 the expected life span is
five years. The salvage value at the end of 5 years is sh20, 000. The value of the car
at the end of the 5 years will be sh20, 000. Using sum-of the-digit method in
allocating depreciable cost on its fixed assets and closes its books on 31st December
each year, show depreciation expenses on the car each of the five years.

Solution
Depreciation cost of the car =cost - residue value
221,000 – 20,000 = 201,000
YEAR VALUE AT THE START OF DEPRECIATION PER BOOK VALUE AT
THE YEAR YEAR THE
END OF
THE YR
1ST 221,000 5/15 X 201,000 =67,000 221,000-67,000 =
154,000
2ND 154,000 4/15 X 201,000 = 53600 154,000-53,600 =
100,400
3RD 100,400 3/15 X 201,000 =40,200 100,400- 40,200 =
60,200
4TH 60,200 2/15 X 201,000 = 26,800 60,200–
26,800=33,400
5TH 33,400 1/15 X 201,000 = 13,400 33,400– 13,400 =
20,000

1
. Reference: financial accounting by Daniel W. Wimuda (page 140- 143)
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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Example 3:
The price of a tractor was ksh1, 000,000 in January 1997. The estimated life span is
12years. The salvage value is expected to be ksh100, 000. Using the three methods
(straight line method (S.L.M), declining depreciation, sum of the year’s digit) of
calculating depreciation, state the values of the tractor in the Januaries of all the
years for the 12 years.
YEAR/ DEPRECIATION PER YEAR BY BOOK VALUE FOR EACH OF
JAN. THE FOLLOWING METHODS THE METHODS AT THE
JANUARY MONTH
S.L.M D.D.M S.D.M S.L.M D.D.M S.D.M
1997 0 0 0 1000,000 1000,000 1000,000
1998 75,000 75,000.00 138,461.54 925,000 925,000.00 861,538.46
1999 75,000 69,375.00 126,923.08 850,000 855,625.00 734,615.38
2000 75,000 64,171.90 115,384.62 775,000 791,453.13 619,230.76
2001 75,000 59,358.98 103,846.15 700,000 732,094.10 515,384.61
2002 75,000 54,907.00 92,307.70 625,000 677,187.10 423,076.90
2003 75,000 50,789.00 80,769.23 550,000 626,398.10 342,307.69
2004 75,000 46,979.90 69,230.77 475,000 579,418.00 273,076.91
2005 75,000 43,456.40 57,692.31 400,000 535,961.70 215,384.60
2006 75,000 40,197.10 46,153.85 325,000 495,764.60 169,230.75
2007 75,000 37,182.30 34,615.39 250,000 458,582.30 134,615.36
2008 75,000 34,393.70 23,076.92 175,000 424,188.60 111,538.44
2009 75,000 31,814.10 11,538.46 100,000 392,374.50 100,000

Annual depreciation for SLM (D) =(1,000,000 – 100,000) /12 =sh75, 000
DDM % depreciation =75,000 /1,000,000 =7.5%

4.Revaluation method
For some assets like loose tools, crates bottles, or assets that may appreciate like land,
revaluation is the most suitable method of arriving at depreciation provisions.
Revaluation means putting new values to the assets. The difference between the new
values and the cost or the former valuation represents depreciation if the new values are
bigger than the former.
E.g. Crates were valued at sh40, 000 on 1st January 2001 and on 31st December 2001 they
were valued at sh45, 000. In the course of the year crates worth sh15, 000 were bought,
calculate the depreciation
Solution Depreciation =(40,000 +15,000 –45,000) = sh10, 000

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Application of Law in agriculture
Ethics of a farm manager
1) Integrity: A manager should be straight forward honest and sincere in
his/her approach to his/her professional work.
2) Confidentiality: Information acquired in the course of professional
work should not be disclosed except where consent has been obtained
from the client, employer or other proper source (information gained
should not be used for personal gain)
3) Technical standards: A manager has a duty to carry out his
professional work with care and skilfully in conformity with the
professional and technical standards as per the law of Kenya.
4) Professional competences: A farm manager has duty to maintain a
high level of professional competence through out his/her career. He
should not undertake a task, which he is not himself competent to
perform unless he obtains such advice, and assistance as will enable
him competently carry out his task.
5) Accountability: A farm manager in practice is strictly accountable for
all clients’ money received by him on contract or so.
6) A farm manager should avoid all conduct or practice which is likely
to discredit the profession or deceive the public.
7) The law of contract: The law of contract is the foundation upon
which the superstructure of modern business is built. In business
transactions quite often promises are made at one time and the
performance follow later. The law of contract lays down the legal rules
relating to promises, their formation, their performance, and their
enforceability.
8) The nature of contract: A contract is an agreement or promise, which
is legally binding or enforceable by law. The law of contract imposes
an obligation on every person to honour his legally enforceable
promise, failure to do which renders him liable to compensate the
injured party. What is intended here is to promote commercial
relations.

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Essentials of a valid contract
The essential elements of a valid contract as follows
1. Offer and acceptance: There must a ‘lawful offer’ and a ‘lawful
acceptance’ of the offer, thus resulting into an agreement.
2. Intention to create legal relationship. There must an intention among
the parties that the agreement should be attached by legal consequences
and create legal obligations. Agreements of social or domestic nature
do not contemplate legal relations, and as such they do not give rise to a
contract. E.g.. An agreement to dine in a friend’s house or buy a gift for
the wife/husband is not a contract because it does not create legal
relationship. In commercial agreements an intention to create legal
relations is presumed (e.g. buying and selling issues are contracts)
3. Lawful consideration: Consideration is the price paid by one party for
the promise of the other. An agreement is legally enforceable only
when each of the parties to it gives something and gets something. The
something given or obtained is the price for the promise and is called
consideration.
4. Capacity of parties: The parties to an agreement must be competent to
contract; otherwise law cannot enforce it. In order to be competent to
contract, the parties must be of sound mind and must not be disqualified
from contracting by any law to which they are subject.
5. Free consent: Free consent of all the parties to an agreement is that the
parties must have agreed upon the same thing in the same sense. There
is absence of free consent if the agreement is induced by coercion,
undue influence, mistake, misrepresentation etc.
6. Lawful object: For the formation of a valid contract, it is also
important that the parties to an agreement must agree for a lawful
object. The object for which the agreement has been entered into must
not be fraudulent or illegal or immoral or opposed to public policy or
must not imply injury to the person or property of another.
7. Possibility of performance: The contract must be capable of
performance. If the act is impossible in itself physically or legally, the
agreement cannot be enforced by law.

All the above elements must be present. If one or more elements are absent then the
contract may be void, voidable or unenforceable.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Procedures of filling cases
1) Civil cases
a) Petition or plaint or any other application is presented
to the court registry during normal working hours.
b) The court registry assesses the fees payable in respect
of the petition or other pleading.
c) The petitioner or his advocate is required to confirm
instant ability to pay the fees if so the petition is
registered in the register of either petitions plaints or
other applications. The petitions are numbered in the
order of presentation per calendar year
d) Upon payment of the subscribed fees the petition is
stamped to indicate the date of presentation
e) The court issues summons to be served together with a
copy of the petition upon the defendant/offender or the
party against whom relief is sought requiring him to
enter appearance in the case within 15 days
2) Criminal cases
a) The officer commanding police station (OCS) that
investigates a crime leaves to the place where crime
was committed or any other law enforcement agents
e.g. CID, flying squad, local authorities, children
officer, draws a charge sheet specifying the date, time
place, circumstances and particulars of the person so
alleged to have committed the offence and the section
of the law so contravened.
b) The charges sheet is presented to court for registration
together with the accused if in police custody within
ordinary working hours.
c) The accused is required to answer to the charges
immediately. If he is out on police bond and fails to
attend court, warrant of arrest are issued immediately.

Concepts of Human Resources Management

1) Interviews and recruitment: A selection interview is an extension and
development of the meeting, which takes place between an employer and a
prospective employee. It includes questions designed to test achievement or
aptitude (natural ability of doing something)
2) Purpose of selection interview: To illicit information about the candidate’s
motives and behaviour in order to assess personality. To check the factual
information the candidate has already given about him or herself, to examine the
value and relevance of experience and qualifications and often to give an
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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 achievement test in symbolic terms. To give information about the job to the
prospective employee (NB/ this is usually omitted but it is very essential)
NB/ Selection is mutual, the employer selects the candidate and the candidate must be
given the information needed to select the employer.
An interview serves as a two-way communication channel that allows both organisation
and applicant to collect information from each other.

Human resources management (HRM)

These are activities undertaken to attract, develop and maintain an effective work force
within an organisation

Human resources planning (HRP)

Human resources planning (HRP) is the forecasting of human resource needs and the
projected matching of individuals with expected vacancies. Human resources planning
(HRP) begin with the following questions:
What new technologies are emerging?
What is the volume of the business likely to be in the next five to ten years?

Recruitment
Recruitment is defined as activities or practices that define the characteristics of
applicants to whom selection procedures are ultimately applied

Staff development
Staff development refers to teaching employees and professionals the skills needed for
both present and future jobs

Human relations and communication

Human relations and communication involves activities and practice of management that
emphasizes satisfaction of employee’s basic needs as the key to increased worker
productivity.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Farm Records
Uses of farm records
Farming like any other business, involves many activities. The farmer needs to keep clear
and good records of what happens during these many activities, and if he does not do that
he runs the risk of forgetting many things he has done or ought to do. It is necessary
therefore that the farmer keeps account of all the various activities, in writing, so that he
does not forget them.
The records must be neat, concise and complete. They should not include any guesswork
or estimates, but should show actual amounts, weights, measurements, dates etc, as the
case may be. This means then that these accounts are actually a record of what has
occurred or is occurring. Up to date and true records, methodically kept throughout the
year, on all operations, are important and useful to the farmer in the following ways.
Ordinarily, to record is to set down in writing or other permanent form. And an account
simply means chronological statements of money dealings; hence an account also means
to give a reason or explanation.
Therefore farm records and accounts can be defined as statements on financial, physical
and other detailed information about a farm business undertaking. By this quality are
used and the layout of the records are specified.

An account interprets the data as well as recording, summarizing the inventory,

production, sales and purchase together with expenses. Hence accounts can be defined
further as systematic financial record or statement of receipts and expenses.

The farm trading account normally covered a twelve months period that may be the
calendar year i.e. from 1st January to 31st December but the trading account period can
begin any period (time). In order to facilitate accounting or recording, accounting
machines are being used which are designed to add, subtract, multiply etc .a series of
figures and type results into sheets according to the pre-arrangement format.

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General Principles of Record Keeping
Records may become fetish and get so complex that they mislead instead of aiding
logical decision-making process. Hence records should be
1. Simple (concise)
2. Precise and complete
3. Understandable and neat
There the form in which records of all physical and financial transactions are kept should
satisfy the following principles:
1. The record should be easy for the recorder to fill in accurately
2. All records of value (goods and services) must be neat and
complete
3. The record should be used in proving the standards of farm
management so that the value of keeping records can be of benefits to
the farming as a business undertaking i.e. they should serve a definite
purpose
4. In farm records, quantities should be actually measured e.g.
acreage of land, yields of crops etc. it should not be a matter of
guesswork. Hence the records should be up to date so that any action
needed is taken as soon as possible.
5. The record should be compared with some standards ( eg other
progressive farms) for comparable enterprise in a similar physical and
environmental conditions.
6. The record should be filled as soon as possible after the
operation or the transaction and checking them regularly. I.e. the
system should ensure nothing is omitted.
7. The record should provide useful management information i.e.
the information should of maximum use to the field managers and
accountants.
8. Personal accounts should be separate from the business accounts

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Importance (uses) of farm records
Record keeping is not by itself productive, so it is pointless to record anything unless the
record can be profitably used to make informed decisions. Farming is becoming highly
competitive and need frequent decision and records supply the facts upon which to base
these decisions.
The advantages of keeping physical and financial records are as follows:
1) The records provide a base for a decision making i.e. managerial
decisions. The farmer or the farm manager is able to distinguish areas
of weaknesses, which can be abandoned or corrected, or areas of
success, which can be exploited or improved to the maximum, hence
profit maximization.
2) Records provide ready information for forward planning and
budgeting.
3) Records provide means for controlling thefts, losses etc.
4) Records are used to determine the profitability of the individual farm
enterprise i.e. gross margin analysis. This involves analyzing input –
output relationship of the individual enterprises and determine which
one is more profitable to continue with even expand on.
5) It is used to determine the profitability of the farm business i.e. total
revenue (TR) minus total cost (TC) to give net farm income (NFI)
6) Records provide bases for fair income tax assessment. Hence a farmer
who does not keep proper records is likely to be overtaxed.
7) Records aid in acquiring a loan. Banks and credit institutions like
Agricultural Finance Corporation, commercial banks and crop boards
etc. always require well-kept records when the farmer is applying for a
loan (credit).
8) Records are also useful in valuing the farm in case the farmer wishes
to sell the farm or lease it out.
9) Records provide the data for comparing the performance of the farm
over the past years. Physical records enable the farmer to make
comparisons of output (yields) and outputs between seasons.
10) Records provide data for comparing the farmer’s performance with
other farms or “ standards” for comparable enterprises in similar
physical and economic environment.
11) Records provide the data for determining the net worth. I.e. what the
farm is worth. I.e. record provide data for preparing the balance sheet
by valuing the assets and liabilities of the farm business (Assets –
liabilities = net worth).
12) Farm records help in settling disputes between heirs to the estate in
case the farmer ides without leaving a will.

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 13) Where several people or partnership owns a farm business, properly
kept records helps in settling accounts when it comes to sharing the
profits or losses made by the farming business.

In summary farm records will help the farmer in making far management decisions e.g.
organizing, farming, rotations and selecting farm enterprises, formulating definite
production policies, planning and budgeting various enterprises. Finally they help him in
selling a certain thing like animals, machinery or the farm itself.

Types of records and their uses

The type of record each farmer keeps mainly depends on the type of farm projects and
enterprises being undertaken. There are two major types of records namely:
1. Physical records
2. Financial records
Physical records
Physical records are entries (records) of tangible items such as fertilizer, seeds, feeds, fuel
etc. as the price of both products and inputs always changes, Physical records are usually
more important than financial records. This is especially true if the data is needed for
planning and budgeting.
Advantages of keeping good physical records
1. Provide some of the necessary information from which detailed
financial information can be produced regularly
2. Physical records are used to check and control physical performance
3. Physical records are used in guiding future decisions
4. Physical records provide the basic data needed for planning and
budgeting.
Types of physical records
Physical records should include the following:
a) Crop records
b) Livestock records eg
i) Livestock number record
ii) Breeding records
iii) Production records
iv) Feeding records
v) Health records
c) Workshop records e.g. machinery records - e.g. tractors inventory records
d) Physical input records
e) Labor records e.g. master roll , field operation records
f) Stores records

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
1. Crops records
A crop record book should include details of the crops grown on each plot hence also
referred to as a crop production records. Some of the details include:
- Acreage
- Land preparation date and method used
- Date of planting, seed rating
- Date of fertilizer application and amount used
- Date of weeding and method used
- Date of pesticide application, type and method used
- Date of irrigation if any
- Date of harvesting and the amounts in kg per hectare
- The amount of labour
Note
It is important that each enterprise should have its own records books for ease of analysis,
checking etc.

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Crop record Format
Maize production record

Crop grown -------------MAIZE

Net area ------- 120 ha. Field No.-------- 006A
Ploughing date ------------ 7TH February 7, 2007 Variety—511
Planting date----10TH February 7,
2007
Spacing -----0.9M X 0.3 M
Inputs: Seed rate kg / ha. 30KG
Fertilizer type at planting DAP ----------- Amount-------72
BAGS
Fertilizer type for top dressing CAN--------- Amount --------60
BAGS
Other treatments --------FYM APPLIED 1000 KG/ Ha.

Pest attack ( if any) --------------------STOCK BORER Control -PYMAC----

---------------
Disease (if any) ------------------------- N/A Control -------------------
-N/A
Weeds ------------------WONDERING JEW Control --
HERBICIDE (ROUND UP)
Other treatments--------------N/A
Output Harvesting date –10TH AUGUST 2007 Method used ----
------ MANUAL-
Yield per ha. --------40 BAGS
Amount kept for seeds--------- 9 BAGS
Remarks ----------------------CROP DESTROYED BY EXCESS RAIN BEFORE
HARVESTING ON 7TH AUGUST 2007

2. LIVESTOCK/ ANIMAL RECORDS

Intensive livestock enterprise e.g. beef, dairy, piggery, goats and poultry need good
records if the danger of financial loss is to be avoided. Generally livestock records
include ages of individual animals, births deaths, losses, thefts, sales farm slaughtering,
purchases, breeding records, feeds record etc.

The type of record needed depends on the particular livestock enterprise and the sources
of the most common ones are as follows:

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
a) Livestock record numbers
To assess the efficiency of livestock enterprise, it is clearly necessary to know how many
livestock of each class on the farm and hence the total. Livestock number varies
throughout the year owing to births, deaths, sex, purchases, sales, losses, theft, transfers
of stock from one category to the other e.g. from gilts to sows. Hence a monthly
reconciliation of livestock numbers in each category and their total is essential.

A format of Livestock record numbers

DATE Class of No. In No. Bought Born Total Sold Total in
animal hand hand
st
31 Mar SHEEP 100 40 7 147 27 120
2007
GOATS 150 50 8 208 18 190
POULTRY 1000 500 600 2100 100 2000
DAIRY 50 20 3 73 3 70

NB
Cattle number on ranches are checked when dipping/ spraying etc.

b) Breeding record
These are records kept to show the breeding activities and programmes, for all classes of
animals in a farm.
This record resembles the card used when AI is used. However it is also applicable when
the farmer uses natural method of mating his cows in his breeding programme.
Breeding records are very important in livestock enterprise especially beef, dairy,
piggery, poultry etc. It is therefore essential to keep basic records of the performances of
each breeding cow. Checking the breeding performance of each animal is vital to
profitability and is a valuable aid to culling and selecting new breeding stock on their
progenies performance based on some set of standards e.g. District guidelines or other
progressive farmers with good records but of similar physical and economic environment.

Hence breeding records show details of the breeding pattern of various animals on the
farm for example:

- Name and number

- Date when a cow was served
- Calving date
- Date of pregnancy diagnosis
- Calf born whether male or female
- Whether difficult birth or still birth

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 - Sire used for service

Simple cattle breeding record is shown below:

Cattle breeding record

DAM NO… BREED PARENT: SIRE. ………… PARENT: DAM………..

COLOUR… AGE: ……… AGE: ………
1ST SERVICE 2ND SERVICE 3RD SERVICE 4TH SERVICE REMARKS NO. OF
SERVICES
DATE OF DATE OF DATE OF DATE OF
SERVICE………. SERVICE………. SERVICE………. SERVICE……….
TIME OF TIME OF TIME OF TIME OF
SERVICE… SERVICE… SERVICE… SERVICE…
BULL NO……… BULL NO……… BULL NO……… BULL NO………

Pregnancy diagnosis: Date …………………………………………………………..Result ………………..

Expected date of calving ……………………
Actual date of calving ……………………..
Weight of calf at birth ………………………
Sex of calf ………………..
No. of calves ………………..

Calving record
DAM Sire no. Date of Date of Sex of Weight of Calf no../ Remarks
NO. service calving calf calf name
DAM 1
DAM 2
DAM 3
c) Milk records
This is an example of production record. Milk record is relatively for livestock enterprise
and it needs much husbandry and skills. Milk production records are needed for each cow
to enable them to be fed correctly and to know whether to breed from them or cull them.

Some of the details in the milk records should include the following:
- Name and the No. of the cow
- Total milk per cow in the morning and evening
- Milk sold
- Milk fed to calves
- Milk given out or payment in kind
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 Milk records (production record)
Month of………….APRIL 20..07
Name / no. Days in the month and amounts in liters TOTALS REMARKS
of cow 1 2 3 4
AM P AM P A PM A PM
M M M M
Kandogo 10 9.3 11 10 8.4 9.4 4 6 Sick on 4th

Continued to the end of the

Nyati
Weco
…..
TOTALS Total per
month...
Fed to calf
Given away
Total sold Net

month
amount
sold..

NOTE It is very important to check how much each cow produces so as:
i) Those producing more and better milk can be retained
ii) Those producing badly can be removed from the breeding stock or culled
d) Feed records
The most important general physical record for livestock enterprise is the use of both
bought and homegrown feeds. Feeds cost are usually the only ones where great savings
are possible especially with pigs, poultry and dairy where most other costs are fixed. It is
important to record the use of home grown feeds as it is on bought ones. They are records
of various feeds and quantities given to animals and will also show growth rates of the
animals (conversion ratio)
Feeding records
Daily feeding record for the month of ………………………………..
Enterprise …………………………………………………………….
Type of feed …………………………………………………………..
Date No. of Amount Amount Balance in Remarks
animals received in used stock
kg

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 e) Health records
Good health in livestock is very important as it means, to some extent, more and better
production which in turn means more profit to the farmer.
It is the concern of every farmer to keep his livestock healthy. To keep livestock healthy
the farmer must prevent outbreaks of pests and diseases and treat those animals that are
sick. To enable the farmer to carry out this husbandry practices effectively and at the
right time he needs to keep very clear and comprehensive records. This records will help
the farmer to know what animal to cull on health grounds, remind him when certain
disease/ parasite prevention operations are carried out and so on
Health records format
2
Date Disease Animal(s) Drugs used Cost of treatment Remarks
symptom affected given

4.WORKSHOP RECORDS
Also known as stock control records. This will show details of fuel, machinery, tools,
fertilizers etc. items in the workshop include:
- Date of purchase
- Type/ make of the tools/ machinery
- Date of repair
- Date when the service is due
- Date of disposal
- Spares held in store
- Items received e.g. nails
- Items used e.g. nuts
- Tractor use record by enterprises
Each item has got its own records in details for ease of analysis. Records of machinery
and labor have the following uses:
- Enables job performance to be compared with the standard
- Provide figures for planning
- Provide a check of whether the workshop is progressing

5.PHYSICAL INPUT RECORDS

Whenever a farmer is using his/ her seeds, family labor, own stored produce to feed
livestock and family, own tractor etc, he must compute money value for them for

2
Under remarks, information on deaths, next vaccination, frequency of diseases etc. Should be entered.
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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 recording and accounting purposes. This is because he would have hired tractors etc,
if he were not having his own

6LABOUR RECORDS
Labor records especially casuals are always enterprise specific and therefore are first
recorded with the enterprise where used.
Generally the labour records especially those of regular (permanent) labour will
include some of the following
- Time when engaged, age sex etc.
- Whether permanent, temporary, casual, contract etc.
- Whether skilled, semiskilled or unskilled.
- Grade or position e.g. clerk, supervisor etc.
- Rate of payment
- Daily attendance including the total number of hours worked
NOTE:
Type of labour record will depend on type of business, type of labour, employment terms
etc. it is usually entered into a master roll.

INVENTORY RECORDS
Inventory records are basically divided into two groups. There are those inventory
records on consumable goods and those on permanent goods. Consumable goods include
items like animal feeds, fertilizers, drugs and some construction materials like cement
and so on. On the other hand permanent goods include things like tools and equipment.
Inventory records will show all assets on the farm e.g. livestock machinery, some crop
and land etc, at a time in the year.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
 a) Consumable goods inventory
RECEPTS ISSUES
DATE COMMODITY QUANTITY DATE ISSUED QUANTITY BALANCE
TO:

DATE COMMODITY QUANTITY WRITTEN BALANCE COMMENTS

OFF

b) Permanent goods inventory

Revision questions
1. Why should a farmer keep farm records?
2. How can a farmer use his farm records to improve his
farming?
3. Why do institutions loaning money (credit) to farmers insist
on seeing farm records of the loan applicant?
4. Name eight basic farm records an average farmer should
keep.

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Revision Questions (Farm Management)
QUESTIONS 1
A farmer is considering purchasing a combine harvester, which is to replace the current
practice of hiring a custom combine harvester to harvest 800 acres of wheat. The cost of
combine harvester is sh.12,000,000 and life span is 15 years. The salvage value is
1
expected to be zero (0) after that period. The farmer must pay an interest of 33 3 % on the

loan borrowed. Taxes and Insurance totals sh.50, 000, which should be paid each year.
In the course of the year repair cost would ksh.80,000. Fuel and oil would be 60,000 and
labour would be sh.50,000. The custom combine harvester charges are sh.1, 500/acre for
200 acres. Using a partial budget, determine whether this plan is feasible

QUESTION2.
Consider the following data on two enterprises Irish potatoes and maize.
ENTERPRISE SIZE IN Ha. TOTAL VARIABLE COST TOTAL
Irish Potatoes 2.5 6,250 21,250
Maize 2.5 2,250 5,625

The farmer intends to reduce maize to 2.0 ha and expand the potato area to 3.0 ha. The
farmer believes that the changes will earn him a higher income. Given that variable cost
and gross output per unit resources will change proportionally.
Work out the partial budget of the planned change and advice the farmer on the effects of
the contemplated change.

QUESTION 3
.Mr. Koech a farmer in Kitale has got 20 hectares of land which he
Wants to plant and keep livestock.
Maize 10 ha.
Sunflower 3 ha.
Groundnuts 2 ha.
Dairy animals 2.5 ha.
Irish Potatoes 2.5 ha.
The output and prices of the production are as follows: -
maize gross output 30 bags/ha. at a price of 1300/per bag.
Sunflower gross output 30 bags/ha at a price of sh. 3,000 per bag.
Groundnuts gross output 20 bags/ha. at a price of sh. 3,200 per bag.
Dairy animals gross output 3,000 litres/ha. @ sh. 20 per litre.
Irish potatoes gross output 70 bags per ha. at sh. 700 per bag.
The farmer has got the following information: -
cost of land preparation – sh. 6,000 per ha. This includes primary and secondary tillage.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
He expects to buy 60 bags of fertilizer at a cost of sh. 1700/bag.
Weeding - 20 man days per Ha. @ sh. 200 per man day.
Harvesting - 50 man days @ sh. 40 per man day.
Transportation cost to be sh. 3000
Storage expenses to be sh. 500
Interest to be paid sh. 1,500 during the season.
Insurance fee sh. 3,000
Animal feeds sh. 20,000
Veterinary services sh. 4,000
Seeds
3 bags of sunflower @ sh. 1,000 per bag.
1/2 bag of groundnuts @ sh. 4,000 per bag
50 bags of maize seeds @ sh. 4,000 per bag
3 bags of potatoes @ sh. 2,000 per bag
Cost of management sh. 30,000 miscellaneous sh. 10,000 prepare a complete farm budget
and determine whether it is profitable to implement the farm budget

QUESTION 4.
Mr. Gathwara a farmer in Maragwa district intends to produce the following output:
30 bags of maize@ sh1,000,
20 bags of beans @ sh2, 000
10 bags of potatoes of potatoes @ sh400
To produce the above he buys:
100kg of maize seeds @ sh200
100kg of beans seeds @ sh50
50kg of potatoes @ sh100 per 50kg bag
Land preparation per each enterprise sh400
Fertiliser per each enterprise is sh500
Sprays & dusting per each enterprise is sh300
Transport per each enterprise is sh200
Disease control per each enterprise is sh200
Using the above information , work out the gross margin of each enterprise and rank the
enterprises according to their productivity.

QUESTION 5.
The farmer who is located in high potential area would like to increase his dairy herd
from 6-8 cows. In doing so, he is going to buy 2 extra cows at a cost of ksh. 20,000 each.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
Out of these two cows, the farmer is expecting to obtain 3,000 liters of milk, which he
will sell at a price of ksh. 10/litre.
The two extra cows will be expected to calf down to two calves which the farmer will sell
at a total cost of ksh. 25,000 (for both calves).
The farmer is also expecting to buy some concetration and minerals for the two cows at a
cost of ksh. 3,000. He requires 120 man-days @ ksh.50/man-day.
He is also expecting to foot some veterinary services for the two cows at a cost of ksh.
500. The depreciation of the new cows is 20% p.a.
Prepare a partial budget and find out whether it is worthy to effect the charge.

QUESTION 6.
Mrs Kiberenge who is a farmer located in Machakos would like to increase her dairy
herd from 6 to8 cows. In doing so, she is going to buy 2 extra cows at a cost of ksh.
20,000 each. Out of these two cows, the farmer is expecting to obtain 3,000 liters of
milk, which he will sell at a price of ksh. 10/litre.
The two extra cows will be expected to calf down to two calves, which the farmer will
sell at a total cost of ksh. 25,000 (for both calves).
The farmer is also expecting to buy some concetration and minerals for the two cows at a
cost of ksh. 3,000. He requires 120 man-days @ ksh.50/man-day.
He is also expecting to foot some veterinary services for the two cows at a cost of ksh.
500. The depreciation of the new cows is 20% p.a.
Let us suppose that in order for the farmer to increase the herd by 2 cows, (as stated
above); the farmer has to provide grazing area for the two cows (i.e. 2ha.), which was
formerly under maize.
This farmer is expecting to produce 50 bags of maize from those 2 ha. The price of those
50 bags is expected to be ksh. 800/bag.
Land preparation is ksh. 600/ha.
Cost for planting using 12 man-days and the cost of each man-day is ksh. 50.
Fertilizers at a cost of ksh. 700/ha.
Harvesting for 4 man-days at kshs. 50 per man-day
General transport at ksh. 3,000
Cost of maize seeds is ksh. 200 per ha.
Sun drying of maize @ ksh. 15 per bag
Weeding to take 20 man-days @ sh 60 per man-day
REQUIRED: Using the above information, prepare a partial budget and explain
whether the changes are worthy.
QUESTION 7
. A farmer has 10.5 hectares of high potential land. Under the present management the
resource (land) allocation and performance are analyzed in the table below: -

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST
ENTERPRISE SIZE IN HA. FIXED COST VARIABLE GROSS
COST OUTPUT
MAIZE 1.5 500 1350 3375
PYRETHRUM 2.0 1200 4800 18000
IRISH 1.5 750 3750 12750
POTATO
MATURE 1.5 800 1500 12000
TEA
HOMESTEAD 0.5 - - -
DAIRY 3.5 (5L.U) 950 1750 15000
TOTALS 10.5 4200 13150 61125

The farmer intends to make some minor changes with the hope of earning more income
as follows:
Expand the potato area to 2.5 hectares.
Increase the grazing area to 4.5 hectares thus increasing the
milking cows to 7 (7 L.U).
From the above information:
Calculate the gross margin per ha. on maize, pyrethrum, Irish Potato, tea, and dairy.
Work out a partial budget of the intended change and state whether it is economically
justified or not.

QUESTION 8.
Mr. Mutiso has the following information available from his farm record books using
the information, work out the complete budget of his proposed major re-organization of
his farm.
PARTICULARS COST PARTICULARS COST PARTICULARS COST
(SH) (SH) (SH)
Fertilizers for 500 Equipment 1000 Land preparation 1500
maize
Fertilizer for 1680 Spraying cattle 700 Weeding 1200
sugarcane
Maize seeds 130 Vet. Service 500 Feed for dairy 550
Sugarcane seeds 750 Dairy house 2000 Miscellaneous
(permanent) 2000
Permanent fence 600 Hired labour 100
He produces 53 tonnes of sugarcane and expects to sell at sh. 130 per tonne, 65 bags of
maize which he expects to sell at sh. 700 per bag and 960 litres of milk which he expects
to sell at sh. 15 per litre.

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QUESTION 9.
A farmer has the following livestock units on his farm.
61 dairy cows
37 bulls
28 beefvoars
17 cattle (under 2 years)
21 cattle (under 1 year)
19 cattle (1-2 years)
100 ewes
81 fatty sheep
51 Goats
a. Find the number of livestock units for each class/ type of livestock.
b. Find the total number of livestock units on the farm.
c. Calculate the stocking rate given that the farmer has 100 ha. and the recommended
stocking rate is 1lu/ ha

QUESTION 10.
A farmer has bought a tractor for sh. 30,000. It is estimated that after
4 years, the tractor is worn so much that repair costs are becoming very high and a new
tractor has to be bought. At that time the estimated value of the tractor is estimated to be
sh.5000. What will be the annual depreciation of the tractor?

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QUESTION 11
.Prepare a balance sheet from the following information for technology farm for 31 st
December 2002.
The farm owed sh. 2000 for fertilizer from KFA, sh. 350 for feeds from Unga Limited,
and had borrowed from the Co-operative Society credit ksh 35,000, which was still
outstanding at the time of making the balance sheet. The money from the bank is to be
paid within five years.
At the time the balance sheet was being made, the farm had sh.3500 cash in the bank and
was owed sh. 1700 for wool sold to KFA. The valuation was as follows:-
Particulars Value in Particulars Value in
sh. sh.
Sheep 1200 Goats 5000
Cattle 35000 Wool 11000
Equipment 20000 Coffee 3000
beans
Buildings 40000 Cattle salt 700
Maize in 15000 Lambs for 9000
store sale
Coffee 60000 Steers for 20000
plantation sale
Do you think if you applied for a loan from the Commercial Bank amounting to sh.
50,000. You would stand a good chance. Explain your answer.

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QUESTION 12.
The following information is available for Kamau’s farm as at 31 st December 2003.

PARTICULAR VALUE PARTICULAR VALUE PARTICULAR VALUE

IN SH IN SH IN SH
Cattle 200,000 Milk sales 200,000 Payment in 10,000
Kind
Poultry 50,000 Cull livestock 40,000 Wages 100,000
sales
Sheep 100,000 Food crop sales 300,000 Stored produce 600,000
Goats 40,000 Vet Al expenses 30,000 Livestock 600,000
Sows 20,000 Concentrates 50,000 Interest on loan 50,000
Stored produce 400,000 Produce 20,000 Depreciation 30,000
consumed at
Home
Equipment 300,000 Dairy sundries 20,000 Equipment & 1,400,000
Machinery
Machinery 800,000
Cash for sale 500,000

REQUIRED:
Prepare a profit and loss account for the farm.
Calculate;
Joint return to management and investment given that the family labour was sh. 50,000
per annum.
ii) Return to owner capital invested in his farm business given that the
farm manager could have been employed elsewhere at ksh. 60,000 per
Annum.
iii) Joint return owners and borrowed capital in this farm business.

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Question 13:
Mr. Ngotho has 4 hectares of arable land, 1.5 Hectares of which are under wheat, 0.8
hectares under maize, 0.3 hectares under fodder crop and the rest under grass leys. He
wishes to know whether replacing 0.3 Hectares of maize with potatoes the following
season would be worthwhile.
The fertilizer rate would have to be increased from 2 bags per hectares for maize to 2.5
bags per hectares, for potatoes and an extra 40 man-days of casual labour per hectares
would be needed as a result of the change. Average yields of maize and potatoes are 56
and 90 bags respectively. The prices are ksh1, 200 per bag of maize and sh1000 per bag
of potatoes. Seeds costs are sh500 per 10 kg bag of maize and sh 1500 per 50 kg bag of
potatoes. Fertilizer costs sh1300 per 50kg bag. Labour is paid sh120 per man-day. He
would require 10 bags of potato seeds and 1 bag of maize seeds, to cover 0.3 of hectares.
Draw up the partial budget and indicate the effects of change.

Question 14
a) What is a balance sheet?
b) Use the following information to prepare a balance sheet for ABELI farm for the
year ending 31st December 2004.
The farm obtained on credit a tonne of manure at sh300,two 50 kg of diammonium
phosphate fertilizer at shs296 each and livestock feed for shs2800. The farm is yet to pay
shs800 as wages for casual workers and shs500 as interests on loan. It has a bank loan of
shs.20000. The debtors of the farm are KCC sh 3600 for milk delivered; Technology
farm shs.8000 for a heifer sold, and shs.600 for hay sold; National cereals and produce
board shs.6000 for maize delivered; co-operative society shs.5000 for beans delivered.
The assets on the farm include inputs in store worth shs.500; dairy animals worth
shs.26000; farm buildings worth shs.75000, tools and equipment worth shs15000, land
shs.120000.
The farm’s bank account has shs.1500 and there is shs.600 in the cash box in the farm’s
office.
c) Is the business solvent or insolvent?
d) Calculate the working capital
e) State the balance sheet equation

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Question 15
.a) State 3 types of budget used in farm management. (3marks)
b) A farmer is considering reducing his dairy farming from 20 cows to 15 cows. He also
intends to buy beef cattle (5 of them). The sale price for a cow is ksh20, 000 and a beef
cattle costs ksh18, 000. The farmer intends to sell the five beef cattle at the end of the
year at ksh21, 000 per animal and buy 5 more cows at sh20, 000 each. The production of
milk per cow per year is 9,000 liters, each liter of milk cost
Ksh10.
Using a partial budget show whether it is profitable or not to implement the intended
change. (20 marks)

1. State the various types of records

2. State the functions of a record
3. Explain the various documents used in Agriculture
4. What are the functions of a balance sheet?
5. State the functions of a profit and loss account

Author’s profile

Notes prepared by Engineer Elias Waweru Ngotho. Elias has taught Agricultural
Engineering and agricultural economics for 15 years at Rift Valley institute of Science
and Technology. He holds a Bsc. Agricultural Engineering of JKUAT, Post graduate
Diploma in Education of Egerton University (Mathematics & Physics), Masters in
Project Planning and Management of University of Nairobi and is now pursuing PhD in
project Monitoring at the University of Nairobi.

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NOTES PREPARED BY ENGINEER ELIAS WAWERU NGOTHO, RVIST