Lec 6 - Principles of farm business analysis Flashcards
(26 cards)
define control function
mprovement in the business is part of managements control function by use of ‘control’ - the process of monitoring the progress of the business and taking corrective action
The principle functions of management are
planning, implementation and control
What are the three Steps in Control?
- Establishing standards for comparison
- Measuring the actual performance
- Taking corrective action once a problem is identified
Re: the Improvement Process, what is ‘improvement’?
closing the gap between the current and desired performance of an operation or process.
What is the first step in the improvement process?
Assessing the gap between actual and desired performance
What is KPI?
Key Performance Indicators - critical measures of business performance
Define Historically based targets
compare current and historical performance
Define Strategic targets
reflect level of performance required to achieve strategic goals
Define external performance-based targets
targets that reflect performance achieved by similar competitor organisations
ie. compares a businesses performance against other comparable operations.
- best practiced as continuous process
- Provides ideas and information not ‘solutions’
- Benchmarking is about stimulating creativity in improvement practice
Define Absolute performance targets
targets based on theoretically achievable levels
Define benchmarking
Business Benchmarking; a process in which a business evaluates its own operations (often specific procedures) by detailed comparison with those of another business (esp. a competitor), in order to establish best practice and improve performance
What are the limitations of Benchmarking?
- Difficult to establish cause and effect
- Often point data rather than longitudinal
- Difficult to include ‘qualitative’ elements such as customer relations, innovation, human resource development etc…
What are the 5 different types of analysis? (flow chart)
- financial Performance (profitability) - how well is a business is using its resources
- Farm size/scale - determines if the business is of sufficient size
- Efficiency - examines the technical and economic efficiency of the production processes
- Financial structure - examines the balance between assets acquired by debt and those contributed by the owners (equity)
- Enterprise mix - examines the mix of enterprises
What are the 3 standards of comparison?
- budgets
- comparative analysis
- historical trends
The two budgets most commonly seen in agriculture are …?
gross margin
cash flow
Gross margin equation?
gross margin (GM) = gross income - variable costs
what is gross income?
gross income - total income (cash & non-cash) before any expenses are paid
define variable costs
costs associated only when production takes place and tend to vary with level of production
define fixed costs
(overhead costs) - costs that will not change in the short run even if no production takes place
give 2 eg’s of variable & fixed costs
variable costs - fuel for machinery & fertiliser
fixed costs - interest rates & salaried labour costs
preferred unit for gross margins is
the limiting resource (eg. land)
the expressed unit for gross margins is
$/hectare
what are the 2 applications of Gross Margins?
- Comparing alternative enterprises within the one farm business
- Farm performance analysis; gross margin analysis can be used to highlight inefficient management practices particularly when compared to other properties
Limitations of Gross Margins?
- do not involve management changes in level of fixed costs
- Do not consider interactions e.g. crop rotations
- Do not consider economy of scope and economies of scale
- Should not be used where the income or the costs are incurred through time periods greater than 12 months
