Lec 6 - Principles of farm business analysis

Question 1

define control function

Answer 1

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

Question 2

The principle functions of management are

Answer 2

planning, implementation and control

Question 3

What are the three Steps in Control?

Answer 3

1. Establishing standards for comparison
2. Measuring the actual performance
3. Taking corrective action once a problem is identified

Question 4

Re: the Improvement Process, what is ‘improvement’?

Answer 4

closing the gap between the current and desired performance of an operation or process.

Question 5

What is the first step in the improvement process?

Answer 5

Assessing the gap between actual and desired performance

Question 6

What is KPI?

Answer 6

Key Performance Indicators - critical measures of business performance

Question 7

Define Historically based targets

Answer 7

compare current and historical performance

Question 8

Define Strategic targets

Answer 8

reflect level of performance required to achieve strategic goals

Question 9

Define external performance-based targets

Answer 9

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

Question 10

Define Absolute performance targets

Answer 10

targets based on theoretically achievable levels

Question 11

Define benchmarking

Answer 11

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

Question 12

What are the limitations of Benchmarking?

Answer 12

• 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…

Question 13

What are the 5 different types of analysis? (flow chart)

Answer 13

• 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

Question 14

What are the 3 standards of comparison?

Answer 14

• budgets
• comparative analysis
• historical trends

Question 15

The two budgets most commonly seen in agriculture are …?

Answer 15

gross margin

cash flow

Question 16

Gross margin equation?

Answer 16

gross margin (GM) = gross income - variable costs

Question 17

what is gross income?

Answer 17

gross income - total income (cash & non-cash) before any expenses are paid

Question 18

define variable costs

Answer 18

costs associated only when production takes place and tend to vary with level of production

Question 19

define fixed costs

Answer 19

(overhead costs) - costs that will not change in the short run even if no production takes place

Question 20

give 2 eg’s of variable & fixed costs

Answer 20

variable costs - fuel for machinery & fertiliser

fixed costs - interest rates & salaried labour costs

Question 21

preferred unit for gross margins is

Answer 21

the limiting resource (eg. land)

Question 22

the expressed unit for gross margins is

Answer 22

$/hectare

Question 23

what are the 2 applications of Gross Margins?

Answer 23

• 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

Question 24

Limitations of Gross Margins?

Answer 24

• 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

Question 25

A cash flow budget application?

Answer 25

• to Assess the economic feasibility of a project
• Used for alternatives involving significant capital expenditure that appears attractive on the basis of
  partial budgets or gross margins

Question 26

What are comparative (ratio) analysis?

Answer 26

the study of financial condition and performance of a business through ratios derived from items in the financial statements or from other financial or non-financial information - allows meaningful comparison of different sized elements
eg. (1) 2200 lambs / 2000 ewes = 1.1
vs
(2) 1200 lambs / 900 ewes = 1.33
thus, (2) flock has better reproductive rate than (1) -> can be compared to low, avg or top performers