BALANCE SHEET OR NET WORTH STATEMENT

 Balance sheet is a statement of the financial position of a farm business at a particular

time, showing its assets, liabilities and equity.
 If the assets are more than liabilities, it is called net worth or equities and its converse
are known as net deficit.
 It indicates an account of total assets and total liabilities of the farm business revealing
the financial solvency of the business.
 It can be prepared at any point of time to know the financial position of the farm
business.
 It shows assets on the left side and liabilities and equity on the right side. Both sides are
always in balance.
 Net worth is placed on the right side along with liabilities, to indicate that the farmer
has a claim against the farm business equal to the equity amount.
 It can also be prepared to study the performance of a business over the years.
 If the net worth increases over different periods, it indicates efficient performance of
the business.

Components of Balance Sheet

Assets:

 Assets are those which are owned by the farmers.

 Classification of assets facilitates the analysis of liquidity of the farm business.

Liabilities:

 Refers to all things which are owed to others by the farmers.

Classification of Assets

1 Current Assets or  They are very liquid in nature.

Short term Assets  They can be converted into cash within short time,
usually one year.

Ex: Cash in hand, agril. produce ready for sale, etc.

2 Intermediate Assets  These assets takes 2-5 years to convert into cash form
or Working Assets
Ex: machinery, equipment, livestock, tractors, etc.
3 Long-term Assets or  An asset which is permanent or will be used
Fixed Assets continuously for several years.
 It takes longer time to convert into cash due to
verification of records, legal transactions, etc.

Ex: Land, farm buildings, etc.

Classification of Liabilities

1 Current Liabilities Debts that must be paid in short term or in very near future.

Ex: Crop loans, other loans, cost of maintenance of cattle,

etc.

2 Intermediate Loans which are due for the repayment within 2-5 years.
Liabilities
Ex: Livestock loan, machinery loan, etc.

3 Long-term Liabilities Loans which can be repaid between 5-20 years.

Ex: Tractor loan, orchard loan, land development loan, etc.

Precautions in Preparing the Balance Sheet

 Accuracy in valuation of assets is difficult in the absence of records; hence
approximations to such valuations need to be used.
o Ex: Crops, livestock and its products should be valued based on market price.
Land and other assets should be valued based on prevailing sale value for similar
types.
 Book value* method will be used to value the durable assets.
 During inflation period, the values for durable assets rise. So it is desirable to make
adjustments in the values of the assets.
*Book value is the realistic value of an asset giving due allowance for depreciation and
improvement. Hence, it then neither market price nor purchase price, but value at cost.
Assets Amount Liabilities Amount
1. Current Assets 1. Current Liabilites
Cash in Hand 10000 Crop loans to be repaid to banks 8000

Savings in Bank 8000 Cost of cultivation 6000

Value of Grains ready for 38500 Other loans 5000

disposal
(due for immediate repayment)

Livestock Products 60000 Cost of Maintenance of Cattle 3600

(eggs, birds, etc.)

Sub Total_1 209000 Sub Total_1 22600

2. Intermediate Assets 2. Intermediate Liabilities

Dairy Cattle 10000 Livestock Loans 8000

 Bullocks 9000 Machinery Loans 15000
Machinery and equipments 190000
Sub Total_2 209000 Sub Total_2 23000
3. Long term Assets 3. Long term
Land (book value) 500000 Tractor Loan 120000
Farm Buildings 25000 Orchard Loan 25000
Sub Total_3 525000 Sub Total_3 145000
Total Assets 850500 Total Liabilities 254600
Net worth or equity 705500

Test Ratios Derived from the Balance Sheet

1. Current Ratio
2. Intermediate Ratio or Working Ratio
3. Net capital Ratio
4. Acid Test Ratio or Quick Ratio
5. Current Liability Ratio
6. Debt-equity ratio or Leverage Ratio
7. Equity Value Ratio

1. Current Ratio
Total current assets
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐫𝐚𝐭𝐢𝐨 =
Total Current liabilities
 This ratio indicates the capacity of the farmer to meet immediate financial obligations
(liquidity).
 If current assets > current liabilities, and if borrower fails to repay the loan, considered
as wilful-defaulter. This is more common in case of large farmer-borrowers.
 A ratio of more than one indicates a favourable run of the farm business.
 This ratio reflects liquidity of a farm business within a year’s time.

2. Intermediate Ratio or Working Ratio

Total current assets + Total intermediate assets

𝐖𝐨𝐫𝐤𝐢𝐧𝐠 𝐑𝐚𝐭𝐢𝐨 =
Total Current liabilities + Total intermediate liabilities

 This ratio indicates the liquidity position of the farm business over an intermediate
period of time (2-5 years).
 A ratio of more than one indicates sound running of the farm business.
 The progressive ratio over time implies the increase in the value of current and
intermediate assets due to minimal physical loss and price decline.

3. Net Capital Ratio

Total assets
𝐍𝐞𝐭 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐑𝐚𝐭𝐢𝐨 =
Total liabiities

 This ratio indicates the long term liquidity position of the farmers.
 A ratio of more than one indicates safety of funds of institutional agencies.
 A consistently increasing ratio over the years reveals the sound financial growth of farm
business.
 This is a most important measure of overall solvency position of the farmers.

4. Acid Test Ratio or Quick Ratio

𝐂𝐚𝐬𝐡 𝐑𝐞𝐜𝐞𝐢𝐩𝐭𝐬 + 𝐀𝐜𝐜𝐨𝐮𝐧𝐭 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞 + 𝐌𝐚𝐫𝐤𝐞𝐭𝐚𝐛𝐥𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬

(𝐛𝐨𝐧𝐝𝐬, 𝐬𝐡𝐚𝐫𝐞𝐬, 𝐞𝐭𝐜. ) 𝐚𝐯𝐚𝐢𝐥𝐚𝐛𝐥𝐞 𝐢𝐧 𝐦𝐨𝐫𝐞 𝐭𝐡𝐚𝐧 𝐨𝐧𝐞 𝐲𝐞𝐚𝐫
𝐀𝐜𝐢𝐝 𝐓𝐞𝐬𝐭 𝐑𝐚𝐭𝐢𝐨 =
𝐓𝐨𝐭𝐚𝐥 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
 This ratio indicates adequacy of cash and income surpluses to cover all current
liabilities during the period of one to two years.
 If there is no difference in the income position of a farmer within that period, current
ratio and acid test ratio reflect the same position
5. Current Liability Ratio

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐢𝐭𝐢𝐞𝐬
𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐫𝐚𝐭𝐢𝐨 =
𝐨𝐰𝐧𝐞𝐫 ′ 𝐬 𝐞𝐪𝐮𝐢𝐭𝐲
 This ratio indicates the farmers’ immediate financial obligations against the net worth.
 A ratio of less than one indicates a healthy performance of the farm business and
over the years the ratio should become smaller and smaller to reflect a consistently good
performance.

6. Debt-equity Ratio (Leverage Ratio)

𝐓𝐨𝐭𝐚𝐥 𝐝𝐞𝐛𝐭𝐬
𝐋𝐞𝐯𝐞𝐫𝐚𝐠𝐞 𝐑𝐚𝐭𝐢𝐨 =
𝐎𝐰𝐧𝐞𝐫 ′ 𝐬 𝐄𝐪𝐮𝐢𝐭𝐲
 This ratio indicates the capacity of the farmers to meet the long-term commitments.
 It also shows the extent of indebtedness in the farm business.
 A consistently falling ratio indicates good performance of farming and the ability of
the farmer to reduce dependence on borrowings.

7. Equity-value Ratio
 𝐎𝐰𝐧𝐞𝐫 ′ 𝐬 𝐄𝐪𝐮𝐢𝐭𝐲
𝐄𝐪𝐮𝐢𝐭𝐲 − 𝐯𝐚𝐥𝐮𝐞 𝐫𝐚𝐭𝐢𝐨 =
𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐚𝐬𝐬𝐞𝐭𝐬

 This ratio indicates the productivity gained by the farmer in relation to his assets.
 The improvement of ratio over the years indicates the increased strength in the
financial structure of the farm business.
 This ratio has a direct bearing on the type of assets one has.
 The managerial competence of the farmer is an essential element in raising the
productivity of the assets.
 Income Statement or Profit and Loss Statement

 It is a summary of receipts and gains minus expenses and losses during a specified
period.
 It is prepared for entire farm for one agricultural year.
 Monitory values are assigned to inputs and outputs.
 Advantage: It indicates trend in the various cost items and whether there has been
any over expenditure on the farm.
 It helps to know the success or failure of a business farm over time.
 It constitutes of three items, viz., receipts, expenses and net income.

Components of Income Statement

Receipts:

 The returns obtained from the sale of crop produce and other supplementary
products like milk and eggs, wages, gifts, etc.
 Gain in the form of appreciation of value of assets.
 Returns from the sale of capital assets (livestock, machinery, farm buildings, etc.) are
not included because such returns are not really obtained during the period.

Expenses:
 Operating costs and fixed costs are recorded.
 Losses in the form of depreciation on the asset value.
 The amount incurred on the purchase of capital assets is not considered.

Net income: It consists of net three items:

Net cash income:
 It shows position of cash receipts minus cash expenses during the period.

Net operating income:

 It is obtained by deducting operating expenses from the gross income.
 It includes crop loans.
 Fixed costs are not considered.

Net farm income:

 Obtained by deducting fixed costs from net operating income.
 Compared to net cash income and net operating income, it is relatively a better
measure of assessing the performance of a farm.
 It is the return accrued to own capital and family labour employed.

Income Statement of a Hypothetical Farm

Particulars Amount (Rs.)

Receipts
A. Returns from the sale of crop output 52000.00

B. Revenue from Milk and Milk products 5000.00

Returns from Poultry enterprises 12000.00

Returns from Supplementary enterprises 17000.00

C. Gifts 2000.00

D. Gross cash income 7000.00

E. Appreciation on the value of assets 3000.00
Gross income 74000.00
Expenses

Operating Expenses or costs

A. Hired Human Labour 10500.00

B. Bullock Labour 900.00
C. Machine Labour 1500.00
D. Seeds 1100.00
E. Feeds 5000.00
F. Manures and Fertilisers 3000.00
G. Plant protection measures 1550.00
H. Veterinary Aid 500.00
I. Irrigation 250.00
J. Miscellaneous 2000.00
K. Interest on working capital 2100.00
Total operating expenses 28400.00
Fixed Expenses or costs
A. Depreciation 3000.00
B. Land Revenue 200.00
C. Interest on fixed capital (incl. Rs. 1500 paid on term loan) 3200.00
D. Rental value of owned land 10000.00
Total Fixed cost 16400
Total Expenses 44800
Net Cash Income 71000-28400
(cash receipts - cash expenses ) =42600
Net Operating Income 74000-28400
(Gross income - operating expenses) =45600
Net Farm Income 45600-16400
(Net operating income - fixed costs) =29200
Financial Test Ratios (Income Statement)

Expenses-Income Ratios

Directly obtained from the income and expenditure pattern.

1. Operating Ratio
2. Fixed Ratio
3. Gross Ratio
 These 3 ratios should be less than one to indicate the profitable run of the farm
business.
 When these ratios are estimated over a period of time, a healthy trend of farm business
is reflected by the descending ratios.

Income-Investment Ratios

By taking one component (income level) from income statement and comparing
against capital investment made on the farm business.

1. Capital Turnover Ratio

2. Rate of return on Investment
 These 2 ratios are related to the income generating capacity of the investment and
are called income-investment ratios.

1. Operating Ratio

𝐓𝐨𝐭𝐚𝐥 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐞𝐱𝐩𝐞𝐧𝐬𝐞𝐬

𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐫𝐚𝐭𝐢𝐨 =
𝐆𝐫𝐨𝐬𝐬 𝐢𝐧𝐜𝐨𝐦𝐞

 This ratio explains the relationship of operating costs to gross income.

 This ratio underlies the magnitude of working expenditure incurred for a rupee
of gross income.
 This is called direct ratio because operating expenses are considered as direct costs.

2. Fixed Ratio

𝐅𝐢𝐱𝐞𝐝 𝐞𝐱𝐩𝐞𝐧𝐬𝐞𝐬
𝐅𝐢𝐱𝐞𝐝 𝐑𝐚𝐭𝐢𝐨 =
𝐆𝐫𝐨𝐬𝐬 𝐢𝐧𝐜𝐨𝐦𝐞
 This ratio indicates the relationship between fixed expenses and gross income.
 This ratio depicts the amount of fixed expenses incurred to realize a rupee of gross
income.
 This is called an indirect ratio because fixed costs are indirect costs.
 3. Gross Ratio
𝐓𝐨𝐭𝐚𝐥 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬
𝐆𝐫𝐨𝐬𝐬 𝐑𝐚𝐭𝐢𝐨 =
𝐆𝐫𝐨𝐬𝐬 𝐢𝐧𝐜𝐨𝐦𝐞
 Gross ratio is obtained by comparing total expenses (operating expenses + fixed
expenses) with gross income.
 This ratio can be called an input-output ratio.

4. Capital Turnover Ratio

𝐆𝐫𝐨𝐬𝐬 𝐢𝐧𝐜𝐨𝐦𝐞
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐫𝐚𝐭𝐢𝐨 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

 The average capital investment is arrived at by adding the value of assets at the
beginning and at the end of the agricultural year and then taking the average.
 This ratio gives the gross income obtained for each rupee of capital invested over
the years.

5. Rate of return on Investment

𝐍𝐞𝐭 𝐫𝐞𝐭𝐮𝐫𝐧 𝐭𝐨 𝐜𝐚𝐩𝐢𝐭𝐚𝐥

𝐑𝐚𝐭𝐞 𝐨𝐟 𝐫𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

 Net return to capital can be obtained by adding bank interest paid to the net farm
income and then deducting unpaid family labour for farm and livestock operations
and management.
 This ratio gives the net return on capital for every rupee of average capital invested.

Management Ratios

 These ratios also measure the productivity of farm business.

 They are not derived from the data available in income statement but from related
information.
1. Management Return
2. Crop yields and value
3. Livestock Income
4. Gross income per man
5. Gross Income per rupee investment

1. Management Return:
  It is derived by deducting unpaid family labour wages and interest on owned capital
from net farm income.
 Better performance of the farm can be assessed by comparing management return for
several years.

Net farm income (Rs.) = 29200

Unpaid family labour wages (Rs.) = -5000
Interest on owned capital (Rs.) = -900
Management Return (Rs.) = 23300
2. Crop yields and value:
 This is worked out by comparing the yields obtained by the farmers for different crops
with those of average yields of the area and also value.
 This data over time helps for appraising the ability of the farm financial manager.

3. Livestock Income:

 The efficiency of livestock management can be obtained by comparing the feed

expenditure against livestock income.
 These data over a period of time helps to know the efficiency parameter of livestock
enterprise.

4. Gross income per man:

 To know the labour efficiency by taking into account the number of labours employed.
 This depends upon several factors like, nature of crops, and other competitive and
complementary factor to human labour like machinery.
 In a homogenous area, there should be stability in gross income over time.

5. Gross Income per rupee investment:

 This is an input-output ratio.

 Progressively higher ratio over the years reflects a better run of the business.
 CASH FLOW STATEMENT

 Cash flow statement is a summary of cash inflows and cash outflows of a business
organization in a particular period (a season or a year).
 It is also known as Cash flow summary or cash flow budget or flow of funds
statement.
 It is usually prepared for the future. It is prepared at the beginning of the agriculture
year and checked every quarterly.
 It helps to assess the time at which funds are required for farming and other allied
enterprises, its sources, the purpose for loan requirement, need of sale and purchase of
capital assets, time and quantum of repayment, etc.
 The statement over the years helps to study the pattern of expenditure and cash
receipts and cash balance that has been raised. The statement throws light on the
performance of the business.

Components of Cash flow statement

1. Cash Receipts 2. Cash Expenses 3. Cash Balance

Terms used in Cash flow statement

Cash Receipts

 Cash Balance: Surplus amount of previous year with the farmer.

 Total operating sales: Returns obtained from the sale of farm products and livestock
products.
 Total Capital sales: Sale of milch animals, etc.
 Non-farm income: Income of family members by their earnings elsewhere.
 Borrowings: ST, MT and LT loans from institutional agencies.

Cash Expenses

 Operating expenses: Expenditure to be incurred on crops and the dairy cattle.

 Capital investments: Purchase of dairy cattle.
 Family living expenses: Expenditure towards food, medical, education, etc.
 Payments of previous year’s debt: Payment of hand loan or small loans.
 Payments of ST loans and instalments on investment loans: Crop loan dues.

Cash Balance

 Sum of amounts realized after deducting expenditure from cash receipts.

Cash flow statement of a Hypothetical farm

Sl. Particulars I quarter II quarter III quarter IV quarter Total

No. (June-Aug) (Sept-Nov.) (Dec-Feb.) (Mar.-May)
I. Cash Receipts (Rs.)
 1 Cash Balance 3000 --- --- --- 3000

2 Total operating sales 1350 1400 30200 7800 40750

3 Total capital sales --- 5000 --- --- 5000

4 Non-farm income 2000 1500 2000 3200 8700

5 Borrowings (ST, MT & LT 7500 --- --- --- 7500

loans from institutions

Total 13850 7900 32200 11000 64950

II. Cash Expenses (Rs.)

1 Operating expenses 8500 6750 6200 5300 26750

2 Capital investment --- --- 6000 --- 6000

3 Family living expenses 2400 2800 3200 3000 11400

4 Payment of prev. year debt 500 --- --- --- 500

5 Payment of ST loans and --- --- 7968 --- 7968

instalments of invest loans

Total 11400 9550 23368 8300 52618

III. Cash balance (Rs). 2450 -1650 8832 2700 12332

Advantages of Cash flow Budget

It helps;

1. To estimate the total credit needs (ST, MT and LT) of the farmers along with time and
quantum.
2. To plan the repayment schedule.
3. To make purchases and sales at the appropriate time thereby it helps to minimize the
credit dependence.
4. To keep ready input requirements well in advance so that last minute rush can be
avoided.
5. To know the farm household expenditure pattern, so that the farmers can keep limits to
avoid wastage.
6. To exercise check on farm costs.
7. To prepare farm business plans for the ensuing years.
8. To the banker for revising the scales of finance, rescheduling loans, etc.
9. It is a tool of financial control to the farmer.