1. AGRICULTURAL/AGRIBUSINESS FINANCEBy
Mrs. Abigail A. Adaku
Dept. of Agric. Econs & Agribusiness

2. Order of Presentation Objective Agricultural Finance
Financial management decisions
Investment decision
Goals of financial management
Financial assets and markets
Financial statements (Income and Balance sheet)
Credit

3. Objective
The purpose is to expose students to basic concepts in agricultural finance, financial management and issues of credit to the smallholders in the agricultural sector (production and agribusiness).

4. What is agribusiness?
Agribusiness has been defined as involving those individuals and institutions engaged in the production, processing, transport, storage, financing, marketing, and regulation of the world's food and fiber products.
The agribusiness system is composed of operators, supporters, and coordinators.
The operating organizations are the farmers, transporters, warehousers, processors, and distributors who handle the physical commodity as it flows from the farm to the marketplace.
The supporting institutions are the farm suppliers, financial entities, and research centers that contribute to the system's operators.
The coordinators are governments, contractors, futures markets, and industrial associations that integrate the various stages of the food-and-fiber system.

5. Finance Finance as a noun is the science of monetary affairs
As a verb, it means to supply money for
Finance professionals think of it as managing money.
For academic purposes we define finance as the study of the flow of funds in an economy or firm

6. Agricultural Finance
It deals with the economics of using financial resources in the agribusiness
It sets out the principles of analysis so the farmer can make a decision with full awareness of the implications.

7. Domestic Trends in Agribusiness Finance
Agricultural share of bank credit portfolio is between 4-5%
Funds available for lending to agriculture are mainly short term funds
Long term funds are not readily available from bank sources.
Emerging financing include contract farming, guarantee schemes, inventory credit schemes, trader credit and government credit schemes.
Find out other sources of financing for agriculture. For example a farmer gets an order that requires additional working capital of Gh 2000 and investment capital of Gh 4000
A shareholder offers Gh 2000 but the bank is reluctant to make up for the difference as the farmer does not have any acceptable collateral. What happens?
Informal lender have high interest rates which can render the business economically non-viable. Banks are put off for a number of reasons. Guarantee schemes brings
Credit to viable but non bankable projects due to lack of collateral by serving as a guarantor to the borrower

8. Importance of Agribusiness Finance
Funding needed for agricultural activities include both investment and operating capital.
Investment capital (medium to long term funds) is needed for irrigation, warehouse, tree crops, pack houses, equipment,
Operating (working) capital is needed for paying labour, utilities, fuel, seed, fertilizer, agrochemicals, etc

9. FINANCIAL MANAGEMENT
FM means planning and control of money and money-related operations within a business.
Concerns acquisition, use of financial resources and protection of equity capital from various sources of risk.
Financial manager’s decisions are drawn from three types of question
What long-term assets should the firm invest in?
What sort of building, machinery and equipment?

10. Financial Management
How will the firm finance the investment? Debt, equity or mix?
How should the firm manage its everyday financial activities such as collecting payment from customers and paying suppliers, etc?
Financial management is broken into three major areas:
investment (capital budgeting),
financing (capital structure) and
working capital (operating fund) management decisions.

11. Financial Management These decision are interrelated.
Decision to invest in a new capital necessitates financing the investment: consider appropriate balance between short term and long term finance and appropriate debt to equity ratio.
The financial decisions in turn influences and is influenced by the retained earnings used in internal financing.

12. Financial Management
The retained earnings are generally dependent on the dividend policy.
It is a major source of funds for the company.
It contributes to decisions on investment in current assets; including cash, inventories and debtors to ensure that the firm has sufficient cash for the payment of its obligation as they become due.

13. INVESTMENT DECISIONS
Involves the process of planning and controlling long-term investment to generate profit.
FM is concerned not only with how much they expect to receive (magnitude), but also with when they expect to receive it (timing) and how likely they are to receive the returns (risks).
Evaluating the size, timing and risk of future cash flows is the essence of capital budgeting.
Capital Budgeting

14. Financing Decisions (Capital Structure)
The firm’s financial structure is the specific mixture of long-term debt and equity the firm uses to finance its operations.
Two concerns: how much should the firm borrow? What mixture of debt and equity is best?

15. Working Capital Mgt. Decisions
What is the least expensive sources of funds for the firm?
Working capital refers to a firms short-term assets: cash, inventory, and short-term liabilities (loans and accounts payable)
Managing WC is day-to-day activity that ensures that the firm has sufficient resources to continue its operations.

16. FINANCIAL MANAGMENT
Financial manager makes decisions for the stockholders of the firm. To increase the value of the stock.
The goal of financial management is to maximize the current value per share of existing stock, or to maximize the shareholder’s wealth. Reduce risk, provide liquidity?
Goal: Profit maximization.
Maslows theory of needs is remote from economics and financial management but it helps to indicate the scope of individual goals and the difficulties an analyst has in designing performance measures that capture the unique characteristics and aspirations of every business and financial manager. By the same principle these multiple hierarchies of goals also imply that using a single goal or measure (annual income) to evaluate the well-being of many individuals may not be satisfactory. Instead a middle ground that portrays several meaningful financial characteristics of business performance and that is suited for measurement and analysis is needed eg. Increasing profit, reducing risk and providing liquidity

17. FINANCIAL MANAGEMENT
Assumed overriding goal of management profit maximization has two shortcomings:
It fails to account for the timing of earning. Maximizing profits leave open the question, which year’s profit?
Shareholders might not want to increase next year’s profit at the expense of profit in later year.
It fails to account for risk and uncertainty.
Most firms plan to operate over long periods of time and as such they are concerned with the timing of their profits during the planning horizon. A growth objective may mean sacrificing some profits in the near future in order to expand profit in the distant future. How much sacrifice should occur to maximize the well being of the firm. Agricultural investments like tree crops, herd expansion build up returns more slowly over time. Yet with more time their profits would exceed those from other investments. Financing terms on loans can also influence the level and timing of returns. The net present value discounted could account for time in the profit concept

18. FUNCTIONS OF FINANCIAL MANAGER
Obtain the best mix of financing alternatives
Raise funds through sale of stocks and bonds
Allocate funds to current and fixed assets
Take day-to-day decisions on working capital management involving credit management, inventory control and cash management
Develop an appropriate dividend policy within the context of the firm’s objective of maximizing shareholders’ wealth.
Functions are carried out while balancing the profitability and risk components of the firm.
Risk components of production and price

19. FINANCIAL ASSETS
Financial assets are legal documents (or pieces of security paper) which give their owners claim to future cash flows.
It is different from real assets such as cars, houses, factories, or machines (capital assets).
Financial assets are either stocks or bonds and their claim to future income is based on ownership or debt.

20. Financial Assets
Other financial assets include: bank loans, treasury bills, treasury notes, certificates of deposit, debentures, treasury bonds, etc.
Stock ownership means that the holder of a share owns a piece of the company that issued the stock.
Owners of a stock certificate can look for two sources of cash in the future: dividends and the eventual selling price of the share.

21. Financial Assets A bond signifies a debt relationship
Purchase of bond imply lending money to the firm issuing the bond. Bond holders earn interest on amount lent over the specified period.
Companies issues financial assets to raise money.

22. FINANCIAL MARKETS
Financial markets are mechanisms or transactions in which the firms’ financial assets are traded.
There are three ways in which the market operated:
Direct financing
Indirect financing
Pass through financing

23. Types of Financial Markets
There are different types of financial markets based on the types of securities that are traded, how trading is conducted and who the buyers and sellers are:
Money market: treasury bills, certificate of deposit
Capital market: shares, bonds, long-term loans,
Primary market: deals in newly issued securities (IPO)
Secondary market: deals in already existing shares
Foreign exchange market: forex bureau, Euro-dollar M
Mortgage market: a market where assets are used as collateral securities.
IPO-Initial Public Offering. When a company first sells its shares to the public

24. Types of Financial Markets
Consumer credit market: a market where assets are given to consumers at cost price plus interest, and payment made at future date.
Over-the counter market: a market where securities are traded in an unorganized manner ( no intermediaries involve, no brokers)
Global: multinationals, national: Local companies, local: suppliers and users of capital and intermediaries:
Public market: financial transaction involving sourcing for funds from the public by users of capital
Private market: financial transactions involving sourcing for funds from specific individuals, groups of individuals or companies

25. FINANCIAL INSTITUTIONS
Banks: Central bank, Commercial banks, Merchant banks, Development banks, Rural banks.
Non-Bank financial Institutions
Insurance companies:
Discount houses
Financial houses
Leasing and hire companies
Venture capital funding companies
Ghana Stock Exchange
Micro-finance institutions (savings and loans)
Informal financial sector (susu, money lenders,)

26. CREDIT
Credit is a sum of money in favour of the person to whom control is transferred.
Provision of credit involve two parties: a lender and a borrower. It involves a price (interest charge)in favour of the lender.
In neoclassical economics, market for credit is like any other market which contains a demand schedule and supply schedule and a price (interest rate).

27. The price adjusts to bring demand and supply into balance.
The lender can be an individual or institution called financial intermediary that provides a supply of credit to potential borrowers.
Once a loan is made the borrower has control over its use, but incurs a debt obligation to repay the principal and interest to the lender.

28. The borrower in credit transaction is a person or enterprise who has a demand for credit.
Credit should not be confused with capital or farm inputs. Credit is not capital but can be used for investment in a capital asset such as tractor or irrigation facility.
Credit is not a farm input such as seed, fertilizer or labour time. It is used, among others to finance the purchase of variable inputs (working capital)

29. Credit is fungible. That is interchangeability in the use to which credit can be put. Fungibility makes it easy for borrowers to divert credit from one use to another.
Savers are the other main actors in the rural finance system. They can be individuals, households or institutions ready to supply funds to be held by a financial institution in return for an interest payment (income flows)

30. This process of saving, lending and borrowing is termed Financial Intermediation.
Institutions that enable this to take place by bringing together savers and borrowers with differing needs in space and time are called Financial Intermediaries.
Flow of funds is from savers to investors (borrowers) and the flow of securities is from investors to savers.

31. Role of Credit
Alleviate critical constraint hampering growth in agricultural output and productivity
Allow farmers to acquire modern technology and improve productivity
Helps farmers adopt better production and marketing strategies
Helps increase value through processing and better packaging.

32. Problems with Agricultural Credit
High levels of default in loan repayment
Lack of collateral acceptable to banks
High interest cost relative to profit levels
Poor release of funds (timing) for agricultural activities
Long gestation period for agric production compared with non-agric activities.(bank preference)
Short payback periods

33. Reasons Bank’s Don’t Lend to Smallholders
High monitoring cost
High administrative cost on small loans
Lack of adequate collateral, i.e. value, location
High risks associated with agric production
Poor record keeping for loan decision making
Previous bad Bank experiences with farmers
Government interventions in agric credit market

34. Why Smallholders Shy Away from Bank Loans
Lack of access to bank facilities in rural areas
Cumbersome loan processing procedures
Poor timing of loan released by Banks
Loans may include hidden costs
Lack of understanding of formal loan processes

35. Financial Statements
Financial statement are needed to assess and monitor the financial position and progress of the farm business.
Balance sheet
Income statement
Statement of owner equity
Statement of cash flow
Traditional practices in agric. Accounting have been informal, simplistic, and diff from the accepted principles of accounting profession because farms have been small operations organized as sole proprietorship, family farms and the farmer had to do all the operations and still maintain the accounts.

36. Balance Sheet
A balance sheet is a systematic listing of all that the business owns (assets) and all that it owes (liabilities) at a specific point in time.
It is a static picture of the firms financial position as of that date
Also known as, net worth statement, the statement of financial condition and statement of financial position.
The balancing factor is the net worth

37. Net Worth Also known as owner equity.
Calculated by subtracting total liabilities from total assets

38. Comprehensive Financial Position as at Dec 31, 2014
2013
2014
Current Assets 8 12
Marketable securities 10 15
Accounts receivables 25 40
Inventory 42 35
Total Current Assets 85
102
Fixed assets:
Gross Investment
125
158
Less: Accumulated Depreciation
(15)
(20)
Net Fixed Assets
110
138
Total Assets
195
240

39. Comprehensive Financial Position as at Dec 31, 2014
Liabilities & Equity
2013
2014
Current Liabilities
Accounts payable 20 27
Accruals 5
Total current Liabilities 25
Long-term Debt 12
Equity
165
201
Total Liabilities and Equity
195
240
The net worth increased from 2013 to the sources of the increase in net worth cannot be identified from these two static (balance sheet) pictures. The income statement is needed for this purpose.

40. Prepare a balance sheet for this farm with the ff. entries
Land – 665,600
Growing crop – 41,888
Operation debt – 33,511
Equipment – 1,028,510
Machinery debt – 162,630
Depreciation for equip.– 607,232
Real Estate mortgage – 376,750
Cash – 15,517
Total Assets= 1,144,283
Total Liabilities = 572,890
Equity = 571,392

41. The Income Statement
This is a summary of the revenue (receipts or income) and expenditures (costs) of the business over a specified period of time
Also know as the operating statement or the profit and loss statement
Contrary to the balance sheet, which is a static picture, the income statement covers the business actions of the firm over a specified period of time

42. Comprehensive Income Statement for the Period Ending Dec 31, 2014
Item
2012
2013
Sales
610
770
Less: Cost of Goods Sold
230
250
Gross Profit
380
520
Less: Expenses
Selling & Administrative expenses
Depreciation 90 15
120 20
Operating Profit
[Earning before interest & tax (EBIT)]
275
Less: Interest expenses 5 10
Earning before tax (EBT)
270
370
Less: Tax (45% of EBIT) 80
115
Net Income
[Earnings after tax (EAT)]
190
255
Dividends (65.8% of EAT)
125
168
Retained Earnings 65 87

43. THANK YOU QUESTIONS

44. QUESTIONS What do you understand by the term agricultural finance?
What are involved in financial management?
Does the Comprehensive Financial Position give a complete picture of agriculture? Explain
Discuss the reason financial institutions shy away from extending credit to smallholder farmers.
What are the main sources of finance for agriculture?