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Glossary of Farm Accounting Terms
(Source: The farming game: agricultural management and marketing. By Bill Malcolm, Jack Makeham and Vic Wright. 2005, Cambridge University Press)
Activity
A particular method of producing a commodity. A more specific term than “enterprise” – for example, spring wheat, winter-fattened steers.
Activity gross income
The total value of the output of a farm activity whether the output is sold or not.
Activity gross margin
Activity gross income minus the variable costs of that activity.
Agribusiness
Businesses that are closely related to agricultural production activities.
Amortised loan
A loan that is repaid in equal instalments of principal and interest, with the interest and principal components of the repayments instalment varying as the loan reduces.
Annuity
A sum of money received or used every year that is equivalent to a larger sum at the present time or at a future time – for example, the equal annual sum that repays the interest and principal on an amortised loan. An annual sum over a number of years that is equivalent to the net present value of an investment project that runs over the same number of years.
Break-even analysis
Testing the key elements of a budget for a proposed change to a system to determine the level at which the key elements of the proposal make the overall result just equal to the result from an alternative action.
Budget
A detailed statement of a future plan of action detailing the expected costs and benefits.
Budget control
The process of comparing the actual performance of an aspect of farm production against the performance that was expected when the budget was drawn up.
Business health
The state of and prospects for profit, financial viability and growth of business.
Capital Items
that contribute to production over at least a medium-term time period such as for more than a year – for example, tractor, land, lime fertilizer, structures and equipment.
Capital gains
Increase in the value of capital items due to a rise in their market value.
Capital investment
Funds used to acquire assets such as equipment, land or stock, or used on improvements, that has a life of more than one year and add to the productive capacity of the farm.
Cash flow
The movement of funds in and out of the hands of an enterprise or individual farmers.
Cash flow budget
A budget of the expected cash in (receipts) and cash out (payments) associated with a particular farm plan.
Cash for age (CFA)
A reject animal that is past its economic life for particular conditions.
Comparative analysis
Comparison of the performance of a particular farm with some “standard” level of performance. (Usually the “standard” is the average performance of a group of broadly similar farmers.) Benchmarking is a term used to describe a similar approach.
Compound interest rate
The rate of interest used in compounding.
Compounding
The way a sum of money grows to a larger sum by adding interest, then re-investing the larger sum to earn interest again – that is, calculation of the equivalent future value of a present sum.
Commodity:
The reports allow users to compare commodities.
Could refer to pome fruit, stone fruit, wheat or oats.
Contingency allowance Allowance included in budgets to cover unexpected costs.
Core discipline
An integrating body of knowledge. Integrates knowledge from many disciplines into comprehensive understanding, analysis and explanation. The core discipline of economics makes it possible to understand, analyse and explain the operation of a whole farm system.
Cost-price squeeze
The phenomenon of farmers’ real costs for their inputs rising and prices they receive for their products being static, falling or rising at a slower rate that real costs are rising. It means that farmers have to increase their production to remain profitable.
Crop:
The reports allow users to compare crops.
Could refer to the specific name that the user gives that comodity such as "cultivar and rootstock" or a nick name like, "Micks Plums".
Debt servicing capacity
Annual whole farm net cash flow available to meet interest and loan repayments.
Decision analysis
A procedure for rigorously and methodically weighing up the expected benefits and costs of a possible action. A way of ensuring that decision makers make decisions that are consistent with their personal beliefs about the risks they face and their personal preferences for possible consequences from the decision.
Decision tree
A diagrammatic representation of the alternative sequential actions of a risky decision problem.
Demand
The amounts of a product or service that consumers wish to buy at range of prices.
Depreciation
The loss in value of capital items as they get used and become older.
Development budget
A budget of cash flows used to assess expected profitability and financial feasibility when planning major farm system changes that will take some time to reach full capacity.
Diminishing marginal returns
The phenomenon where increases in variable inputs added to fixed inputs in a production process results in smaller and smaller increases in total output. The principle of diminishing returns indicates that variable input should be added to the production process so long as the extra return exceeds the extra cost and the maximum total profit is at the point where extra return equals extra cost.
Discounting
The process of adjusting the value of a benefit or cost to be received in the future to their equivalent value in the present time.
Discounting factor
The adjustment factor used to adjust future values to present values, given by the formula 1/(1+r)” where ‘r’ is the discount rate and ‘n’ is the number of the year in the future in which the benefit or cost occurs.
Economic efficiency
Measured by the percentage return on all the capital invested in the business.
Elasticity of demand
The responsiveness of the quantity of a product or service that people demand to a change in price or a change in income. Price elasticity is measured as a percentage change in quantity demanded divided by percentage change in price. Income elasticity is measured as a percentage change in quantity demanded divided by percentage change in income.
Enterprise
The production of a particular commodity or group related commodities. A general term – for example, wheat, beef.
Equity
The value of assets minus liabilities. Also known as net worth. What the business owes the owners.
Equity percentage
Farm equity capital as a percentage of total farm capital – that is (assets minus liabilities/assets) x 100/1.
Farm benefit cost analysis
The budgeting process of evaluating the benefits and costs and the net benefits of an investment to change a farm system.
Finance budget
A budget showing the flows of cash in and out, in normal dollars. Identities borrowings that are needed and interest and principal repayments.
Fixed capital
Land, buildings, bores, irrigation equipment and so on that cannot easily be removed.
Fixed costs
Costs that must be met and are not affected by the amount of output produced in a year. Also called overhead costs. They are unavoidable costs in the short to medium term.
Futures
Quantities of a commodity of defined quality for delivery at an agreed future date. (Chapter 5, pp. 198-200. contains a glossary of key terms relating to future markets.)
Gearing
The rates of debt to equity. Has implications for debt servicing ability and rate of growth of equity. (Also called leverage.)
Gross margin
Gross income minus variable costs. Can be whole farm gross margin as in a whole farm budget or activity gross margin.
Gross margins planning
A procedure whereby activities are selected sequentially on the basis of the highest gross margin from a unit of only one key constraint, usually land.
Growth
Increase in net worth (wealth) over time. Measured as change in equity, or net farm income minus tax and consumption above operator’s allowance.
Hedging
Insuring against a loss on holding stocks of a commodity due to a price change during the period of ownership.
Income elasticity
The responsiveness of demand to changes in income.
Inflation
An increase in the supply of money in relation to the supply of goods and services available and in consequence, a decline in the purchasing power or value of currency.
Innovation
Changing how a farm system operates.
Interest
The annual sum a lender charges someone who borrows funds off them, expressed as a percentage of the sum borrowed – for example, 10% p.a. interest on $100,000 borrowed.
Interest-only loan
A loan where the borrowed capital is not intended to be repaid on a regular and gradual basis over the life of the and instead annual interest is paid on the full amount of the borrowed capital for the life of the loan.
Intermediate activity
The production of a commodity that is not sold directly but becomes an input for other activities of the farm – for example, crop stubble for grazing.
Internal rate of return
The discount rate at which the present value of future benefits from a project equals the present value of total costs of the project.
Investment appraisal
An evaluation of the profitability and financial feasibility of a potential investment.
Linear programming
A mathematical, computer based, and farm planning technique that determines the combination of activities that maximises total gross margin or profit, or minimises costs. There are usually a range of alternative solutions (farm plans) that produce a total gross margin or profit very close to the optimum, and it is not so much what you do as how you do it that is the practical decision rule.
Liquidity
Cash or near-cash reserves. Relates to the ability of a business to service debt.
Livestock feed budget
A budget comparing current and predicted feed requirements of livestock with the feed available and expected supply.
Livestock gross income
The value of livestock production in the form of animals and produce, adjusted for inventory changes.
Livestock trading schedule
A budget used to estimate the annual contribution to gross income from the trading of animals by sales and purchases, and births and deaths and changes in the numbers and value of livestock on hand, from opening number and value of closing number and value. Captures the effect of animal depreciation and appreciation as well as natural increase.
mm/hr:
Millimetres of water applied per hour that the irrigation system is running.
Machinery replacement allowance
Sum deducted from net cash flow each year so that funds area available to replace capital items when they are worn out.
Marginal
Economists term for ‘extra’ or ‘added’. The principal of marginality refers to the profit-maximising level of operation where the marginal revenue from production equals the marginal cost of production.
Marginal cost
The extra cost added to total cost from using an extra unit of a variable input; or the extra cost incurred in growing or selling an additional unit of product.
Marginal product
The change in output arising from using an extra unit of a variable input.
Marginal revenue
The extra net income obtained from selling one additional unit of product.
Marginal value product
The value of an extra unit of output. The marginal physical product of a unit of output time the price per unit of the product.
Marketing margin
The difference between the purchase price and the resale price of a product between two levels in a marketing chain. Indicates the cost of adding services to products.
Monopoly
There is only one seller of a product or service.
Net cash flow
The difference between the money received and the money spent in any one period (week, month, year).
Net farm income
Operating profit minus interest. Also called net profit. It is the return on the owner’s capital.
Net present value (NPV)
The difference between the present value of all benefits and the present value of all costs of an investment with the present values of benefits and costs calculated using a particular discount rate.
Net worth
The value of total assets minus the value of total liabilities (equity).
Nominal terms
Dollar values or interest rates that include an inflation component.
Oligopoly
There are only a few sellers of a certain product or service so that each will be affected substantially by a change in policy on the part of another.
Operating costs
Variable costs plus overhead costs.
Operating profit
Gross income minus variable and fixed (overhead) costs. It is the return on all the capital invested.
Opportunity cost
The opportunity cost of a farm management decision is the amount of net benefit that is given up by choosing one alternative action rather than some other action.
Overhead (fixed) costs
Costs that do not vary as the level of production or mixture of activities changes. They are unavoidable costs in the short to medium term.
Parameter
Any factor that has an important effect of profit (such as yield, price, land area or direct cost).
Parametric budget
A planning technique that takes varying prices and yields into account.
Partial budget
A budget drawn up to estimate the effect on profit of a proposed change affecting only part of the farm. Used to estimate the extra return on extra capital invested.
Payoff matrix
A table showing the probabilities of and outcomes due to different acts and states of nature occurring.
Principal
The amount of capital borrowed when a loan is taken out. Principal repayments are the amounts of capital repaid to settle a debt.
Principle of increasing risk
The more highly geared the business, the more rapidly equity grows when thins go well, but equity declines at an even faster rate when things go badly.
Production function
The relationship between the level of inputs and the level of output for some production process. Also called a response function.
Real terms
Dollar values or interest rates that have no inflation component.
Return on total assets
Operating profit expressed as a percentage of the value of total farm assets.
Return on total capital
The annual operating profit expressed as a percentage of the total capital invested in the business over the year. (Total capital can be capital at the start, end or better, an average of the start and end capital value.) Percentage return total capital is the measure of economic efficiency.
Risk
A situation with uncertain outcomes, but a case where some probabilities can be formed about the outcomes. This in contrast to uncertainty, where probabilities can be formed about uncertain events happening.
Risk premium
An amount that a person requires above a risk-free return before being willing to accept a risk.
Scenario analysis
A way of imagining a set of combined circumstances in the future and the implications for important decision criteria, such as profit, growth, financial feasibility and risk.
Sensitivity testing
Checking the effect on a planned outcome of a change in one of the factors (parameters, coefficients) that affects that outcome.
Solvent
Assets exceed debts.
Spot price
The price for a product available for immediate delivery.
Stock equivalents
Units based in livestock feed budgeting, whereby the energy needs of different categories of livestock are expressed in terms of one type of livestock – for example, dry sheep equivalent (DSE)
Subject probability
The strength of belief an individual will hold about the chance of a particular event occurring.
Substitution
The giving up of one enterprise or activity, or input, for another enterprise or activity or input.
Supply
The amounts of a product or service that will be offered for sale at a range of prices.
Technical efficiency
A ratio of the quantity of physical output to quantity of physical input. Does not indicate profitability or economic efficiency.
Term loan
A loan that is to be repaid in equal annual instalments of principal, with interest charged on the reducing outstanding balance of the loan.
Variable costs (also direct costs)
Costs that change directly according to the amount of output of the activity – for example, fuel and seed.
Whole farm approach
The farm management economic method. Understanding and analysing the farm system – the human, technical, economic, financial risk, institutional elements – as a whole system.
Whole farm cash budget
A budget showing the expected flows of cash in and out of the business for the coming year.
Whole farm planning
Planning for the whole farm, as distinct from practical budget planning.
Whole farm profit budget
Budget showing the expected outcomes of a farm plan, in terms of the entire farm’s profitability for the coming year.
Working capital Capital needed for the day to day operation of a farm. Usually funded by relatively short-term borrowings related to the length of the production cycle – for example, bank overdraft facility and bank bills.
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