Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

Chapter 1
Pre-Activity: List down word/words that are found in the box that are related to
Agricultural Business Finance. List as many as you can.

Z A C T S C A S H F L O W S I U R M P
B G E R B B I N V E S T M E N T E O A
D R F T U O M B H B O O N I F P V N R
E I R E S O U R C E S U O N O D E I T
A B W Q I K R E B T U T P F R E N T S
T U I N N U N S I E S S E L M B U O R
S S O N E M A R K E T I R A A T E R I
V I N T S A I T L R R D A T N O Y A S
B N H G S N T H O S A E T I T R O R K
O E F I N A N C E B T A I O I S U F M
R S T N A G H D T Y E C O N T R O L A
R S E B G E O S H G G T N A W F R I N
O O C S R R A T E G I E S L I O G N A
W R H I I C T O R O C T M L S R A F G
I K N I C C I C E N M O A O E D N O E
N N I U U A O K P L A N N I N G I R M
G O Q M L S N S R S N A A N U O Z M E
P B U R T H M M O P A C G S P O I A N
G J E O U F O O C E G H E P R D N T T
R E S B R A N N E A E I M I O S G I I
I C E C E R E I S C M E E R F K P O M
L T G N I M Y T S E E V N E I R R N E
H I D Y C E D O N E N E T O T E E R O
A V K R E R A R O G T G M T L L C E P
W E A L T H M A X I M I Z A T I O N E
E S K B J O C A P I T A L O S A R T R
A O L Q I P R O C E S S O H K B D S A
T R I N T E R E S T R A T E S L S T T
H N U E P R O J E C T I O N S E A W I
F I N A N C I A L P R E S S U R E H O
E R R B F S H A R E H O L D E R N I N
L I Q U I D I T Y L C R E D I T O R S

1. Which among the word is the main objective of business?

2. Which among the word is the lifeblood of business?
3. Which among the word is the foundation of a business?
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

Chapter 1 – CONCEPT OF AGRIBUSINESS AND FINANCE

Learning Outcomes:
At the end of the chapter, the students should be able to:
1. Describe the importance of finance in the operation of agribusiness
2. Explain the parameters that an entrepreneur use to choose the right mix of
finance to his business.

Learning Proper:

A. What is Agribusiness?

 Agribusiness involves the production, distribution, and consumption of

food, clothing, and even shelter.
 It includes all economic activity in the food and fiber system, which
encompasses the input supply industries, agricultural production, and
post-harvest, value-added activities such as commodity processing, food
manufacturing, and food distribution (Fleet et al, 2014).
 Represents all providers of value-added activities in agriculture. It links
input providers, producers, processors and other services to consumers of
crops, livestock and other natural resources

Input Providers
Input providers supply the necessities for natural resource production. A
significant portion is related to direct and indirect forms of energy.

 Providers of fuels, electricity, and feed are directly used by crops,

animals, and equipment necessary to produce natural products. The
feed may be produced on local land or a mixture of commodities not
available locally.
 Providers of fertilizers, chemicals, and animal health products leverage
energy produced elsewhere to enhance production efficiency. Some
examples of large input providers include Nutrien, Yara International,
BASF, Corteva, and Bayer.

Besides energy, input providers also include the starting materials, labor, and
material necessary for production.
 Providers of seeds, plantlets, young animals, and bees supply
inputs that are the root of agricultural products. These may be
locally sourced or from large businesses.
 Providers of labor and machinery support the manual and
mechanized efforts required to develop raw inputs into raw
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

materials. Examples of labor include farmers, ranchers, and

seasonal workers. Machinery providers include John Deere,
Caterpillar, AGCO, CNH, and Kubota.

Producers
Agriculture production occurs wherever you see land or buildings dedicated to
crops or animals. It varies worldwide, depending on the suitability of the local
climate and geography.

Some producers are land-based, while others are landless, concentrated inside
buildings as intensive operations. Examples of producers span from small
sustenance farms to industrial-scale operations.

Based on worldwide agriculture production value, there are two main production
systems: crop production and livestock production. Other systems include
aquatic and forestry production.

 Crop production involves providers who convert inputs into crops on land
or in greenhouses. Some inputs are naturally occurring (daylight, water),
while others are sourced from input providers.
 Animal production involves producers who take feed and other inputs and
convert animals into meat, milk, eggs, and other animal products.

Processors
Once the raw agricultural product is produced and collected, it may undergo
further refinement.

Two main processing steps are the initial conversion of raw materials to
commodities, then secondary processing into more refined goods.
 Primary processing can be as simple as cleaning and packaging, with
minor changes to the original form. Examples include pasteurizing milk,
raw cotton to cotton fibers, and meat packers.
 Secondary processing converts, mixes, and further refines agriculture
products. Examples include processing cheese from milk, conversion of
corn into biofuels, and manufacturing consumable meat products for
humans and animals.

Nestle and ADM are examples of multinational processors.

Other Service Providers

A number of sectors span the three links. These include middlemen such as
wholesale marketers, distributors, and retailers. The sectors support the
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

movement of products between the links and deliver final products to the
consumer for consumption.

 The term agribusiness is used to refer to economic activities derived from

or connected to farm products. In other words, crop production, as well as
crop processing, transportation and distribution. Agriculture and all of its
economic, social and demographic derivatives… a sector that has an
impact on practically all the Sustainable Development Goals (SDGs)
 It is the complete value-chain in agriculture from the raw materials to
create products to distributors and retailers to end consumers

Agribusiness is one of the largest industries on this planet.

Trivia: What is the nation’s largest employer?

B. Concept of Agribusiness

The term agribusiness implies the process by which corporate firms supply
agricultural inputs or purchase farm outputs and process them for eventual
distribution, as one fully integrated business concern, which is simultaneously
adjusting to changes that are constantly occurring in the business world (Olayide,
1982). This concept of agribusiness was first popularized by Davis and Goldberg
as a means of dividing the structured components of the production process into
sub-structures, which are capable of being administratively integrated. The three
sub-structures identified into the production process were the input or supply
sector; the farm production sector; and the marketing sector.

Agribusiness is the sum total of all operations involved in the manufacture

and distribution of farm supplies, production operations, on the farm and
the storage processing, distribution of farm commodities and items made
from them (Davis and Goldberg, 1957).

Agricultural Entrepreneurship and Agribusiness

 In agriculture, agricultural entrepreneurship is a generic term for the

various small businesses (or micro enterprises) involved in seed supply,
agrochemicals, farm machinery, food production, wholesale and
distribution, food-processing, marketing and retail sales. Although it might
look closely related to agribusiness, it is better not to mix up these two
terms.
 The term ‘agricultural’ used as prefix to ‘entrepreneurship’ is to indicate a
need for clear conditionality and connectivity between the process of
entrepreneurship and a distinct section of society that depends on
agriculture.
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

 Entrepreneurship is a process of producing goods and services using

certain specific inputs, technologies and manufacturing procedures.
 Agricultural entrepreneurship, in the traditional sense, is construed as the
economic activity characterized with features like ease of entry, reliance
on indigenous sources, small scale operation, adopted technology and
skills acquired outside the formal schooling system. However, this
segment suffers from technological obsolescence, low productivity,
inefficiency, inconsistent quality, drudgery and dependence upon nature’s
clemency. Arrival of new technologies as a fall out of globalization, scaling
up production calls for innovation or improvisation in technologies.

What is the Purpose of Agribusiness?

The purpose of agribusiness is to create and supply agricultural products
for end-consumption. Agricultural products are naturally produced
resources for human consumption or other uses.

The products require a variety of sectors and industries to support the

producers, which are central in this value chain. Each link adds value to the
agricultural product.

C. The Objectives of a Business

A key underpinning modern financial management is that the primary objective if

a business is shareholder wealth maximization, that is, to maximize the wealth
of its shareholders (owners). In a market economy, the shareholders will
provide funds to a business in the expectation that they will receive the maximum
possible increase in wealth for the level of risk that must be faced. When
evaluating competing investment opportunities, therefore, the shareholders will
weigh the returns from each investment against the potential risks involved.

D. Concept of Finance

 Finance is the heart and soul of every enterprise. It plays a vital role right
from the establishment of a business to play an important role in driving its
growth.
 Business Finance refers to funds availed by business owners to meet their
needs that may include commencing a business, obtaining finance to
purchase capital assets for the business, or to deal with a sudden cash
crunch faced by the business.
 Prominent loan providers provide finance to cater to the needs of a
business. It is all about estimation, arrangement, and application of funds
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

so that the business has sufficient cash to carry out operations effectively
and efficiently, without any interruption.

E. The Need for Business Finance

The importance of finance cannot be sufficiently stressed. A couple of

advantages of obtaining finance can be described as follows:

 To purchase fixed assets: Every business organization requires some fixed

assets such as land and building, plant and machinery, furniture and fixtures,
etc., and huge funds are required for purchasing these assets.
 To meet day-to-day expenses: Once the business is set up, funds are
required to perform day-to-day business operations like the purchase of raw
material, payment of salaries, rent, taxes, phone and electricity bills, etc.
 To fund business growth: It is to be noted that, the growth of business
greatly depends on the expansion of the existing business line, by adding
multiple product lines, and the enterprise requires funds to further growth of
the business.
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

 To adopt modern technology: It is quite obvious a firm can adopt state-of-

the-art technology when it has got adequate financial resources to acquire
them. In the absence of that firm has to stick to that old technology to produce
goods.
 To fill the gap related to the time between production and recovery
sales: It is quite obvious that sales of the goods produced cannot be made at
the same time when the production is over. So, there is always a time gap
between the two events, i.e. between production and realization of cash out of
the sales made. And during this time business expenses continue to incur, for
which funds are required.
 To hire services of human resources: Manpower is the most basic
requirement of every organization. In fact, a business cannot operate if it does
not have a sufficient and competent workforce. To acquire the services of
human resources, they need to be paid for their work, which is only possible
when the company has adequate funds.
 To meet contingencies: Contingency is basically an anticipated negative
event often unforeseen and non-recurring in nature that may take place in the
future. And to cope with these contingencies, funds are required such as
shortage of raw material, fire breakout in go down, etc.

F. Nature of Business Finance

1. Lifeblood of business - Finance is needed at every step, to perform various

business activities, irrespective of the type and size of the firm.
2. Umbrella term - Business finance is an umbrella term which not just covers
the estimation of funds but also sources of finance, investment of funds
raised, management of cash disposal, control of funds, etc.
3. Basis of Business Activities - Finance is the basis of different business
activities like purchasing, production, human resource, research &
development, and marketing. In the absence of adequate funding, it is difficult
to carry out such activities.
4. Fund requirement differs from business to business - The amount of funds
required differs from one business to another, for instance, the requirement of
funds would be higher in the case of a large company, as compared to a
smaller one. Further, the difference in fund requirement is also based on the
time period.

G. Types of Business Finance

With the above discussion, it is quite clear that the type of funds and the total
amount of funds required by the business differs from one organization to
another. The larger the size, the greater will be the amount of funds needs for its
operations. Additionally, a manufacturing firm requires more funds, as compared
to a trading one. Business finance is mainly classified into three main categories:
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

o Short-term Business Finance

As the name signifies, short-term business finance means the financing required
to meet operational expenses such as purchase of raw material, wage payment,
payment of rent and insurance, electricity, water, and phone bill payment, etc.
Short-term finance is usually required for a period of 0 – 1 year. Another name
for such financial requirement is working capital requirement or circulating capital
requirement.

Here one should note that a certain portion of working capital requirement is
long-term in nature, as a part of these funds is retained to meet the stock
requirement and day-to-day business expenses.

o Medium-term Business Finance

The period of finance, in this case, ranges from 1 year to five years. It is primarily
required for investment purposes like special promotional campaigns,
advertisement, modernization, and renovation, etc.

o Long-term Business Finance

When the term of financing is beyond five years, then it is termed as long-term
finance. This is required to acquire fixed assets like land and building, plant and
machinery, vehicles, furniture, etc.

H. Advantages of Business Finance

Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

1. A business can be capable of meeting its obligations on time. It is a well-

known fact that timely payment of debts creates a credit standing and this will
help in raising funds whenever required.
2. Firms can avail business opportunities easily, without looking for someone to
finance their needs. for instance, it can buy goods at a discount, in bulk.
3. It helps in carrying out operations smoothly, without any delays and
interruptions.
4. The firm can also repair, or replace its plant and machinery, whenever
required, which can help in improving the overall efficiency in operations.
5. Even in the worst situations like recession, trade cycles and lockdown, etc.
firms can easily cope up.

I. Sources of Business Finance for an Entrepreneur

Obtaining finance can be intimidating for entrepreneurs. It is a decision that

should be taken with caution because it is bound to leave a deep impact on the
finances of a business. Finances can be classified based on various parameters
and it is completely up to the entrepreneur to choose the right mix of finance to
his business.

2 Categories:
1. External Funding
 Through debt – entrepreneurs can rely on borrowing in the form of
loans from lending institution to cater to the unique requirements of
their business.
 Through equity – entrepreneurs can pitch their business idea/project to
investors to request for funding. If their pitch is accepted, then
investors give them the capital they need in exchange for a share in
the business. The investors may also then appoint a management
team to oversee the use of funds and business operations. This type
of funding is suitable for start-ups or small businesses which are
looking towards expansion.
2. Internal Funding – internal funds are generated by the owners of the
enterprise in form of shares. It helps owners retain their control over the
company. It also helps them avoid in taking on debt. However, this type of
funding is possible if the owner has sufficient funds to avoid approaching
lenders or investors.

J. Nature and Characteristics of Entrepreneurship

Entrepreneurship as an economic activity emerges and functions in socio-

economic and cultural settings. It is a complex and multifaceted subject. The
followings are the important characteristics of entrepreneurship.
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

a. Decision making: Decision-making activity is one of the fundamental

characteristic features of entrepreneurship. A decision is a course of action
which is consciously chosen from among a multiple of alternatives to achieve
the desired result. As entrepreneurship involves both risk and uncertainty,
decision making is crucial on the part of the entrepreneurs to establish and
run the enterprise successfully.
b. Accepting challenges: Entrepreneurship means accepting challenges
amidst risk and uncertainty. While accepting entrepreneurship as a career,
the entrepreneur accepts the challenges of all odds and puts his efforts to
convert the odds into viable business opportunities by pooling together the
resources for building and running the enterprise.
c. Risk taking: The other important characteristic of entrepreneurship is risk
taking or risk bearing. This implies assuming the responsibility for loss that
may occur due to unforeseen contingencies of the future. Entrepreneur, by
his deep insight and scientific approach, analyzes the situation objectively
and reduces the risk considerably on one hand and enhances the profit factor
on the other.
d. Building organization: Entrepreneurship presupposes the initiative and skill
on building organization. It is by delegation of authorities and proper
leadership that organization can be built up. As per the views of Harbison,
organization building is the most critical skill needed for entrepreneurship as it
facilitates the economic use of other innovations.
e. Skillful management: Entrepreneurship involves skillful management. The
basic managerial skill is the most important characteristic feature of
entrepreneurship. For effective management of an enterprise, the role of an
entrepreneur to initiate and supervise design of organization-improvement
projects in relation to upcoming opportunities is very much important.
f. Innovation: McClelland identified two important characteristics of
entrepreneurship- first doing things in a new and better way, which is
synonymous to innovation given by J.A. Schumpeter, and second, decision
making under uncertainty. So, innovation is one of the most important
characteristics of entrepreneurship.
g. Mobilization of resources: Resource mobilization is also a fundamental
characteristic feature of entrepreneurship. Resources are needed to carry out
activities resulting in accomplishment of goal. They are found in scattered
manner in the environment and required to be perceived, identified and
mobilized by entrepreneurs to attain business goal. Thus, entrepreneurs
make themselves distinct from the rest of population because of their innate
capability to mobilize resources. This is because resources are needed to
ensure success which has the highest priority in the minds of entrepreneurs.

Answer to trivia: Agriculture

Summary:
Entrep 13 – Agricultural Business Finance Chapter 1 – Concept of Agribusiness and Finance

Finance is the foundation of a business. Finance requirements are to purchase assets,

goods, raw materials and for the other flow of economic activities. It is near impossible
to succeed without strong finances in place. You use finance to purchase assets, goods
and raw materials. Essentially anything that will push your business forward. This is why
finance and funds are known as the lifeblood of any business. You simply cannot
function properly unless you have an adequate amount of money accessible to you and
your business.

Business finance is an essential requirement for the establishment of any business.

Money is actually the most important tool to bridge the gap between production and
sales.

Chapter Exercise:

1. Can anyone start a business without finance? True or False?

2. Explain following parameters in financing a business:

 Nature and type of business

 Sources of finance
 Nature and type of finance – financing requirements, duration of finance
 Cost of finance
 Risk and uncertainties