Dairy Farming Manual
What should you know about dairy farm accounting?
| 1 How can you keep accounts by single-entry
book keeping? (5-11)
By entering transactions in one book and filing documents.
|2 How can you calculate profits and losses? (12-18)
Keep payments and incomes over a year under:
|3 How can you keep capital, loan and current
Consult your extension worker about:
|4 How can you analyze net returns and cash flows?
By accounting for:
- labour and other costs and benefits
DAIRY FARM ACCOUNTING
Husbandry Unit 12:
Note: Numbers in brackets refer to illustrations in the Extension Materials.
Record keeping is an activity that is almost completely neglected by small scale farmers, even in literate communities. The farmers may not see the benefits from this extra activity, which appears to be quite unconnected with the practical aspects of dairy farming. The extension officer, therefore, need to make an extra effort to explain the benefits of maintaining accurate records. Maintaining separate accounts for the dairy farm will be helpful in:
- understanding how money is spent and income is earned;
- finding ways of reducing expenses and increasing incomes i.e. increasing profits;
- making decisions about increasing or decreasing concentrate feeds, growing pastures and fodder crops, buying and selling of animals etc.
To get a
correct picture of the income, expenditure and profits (or losses), everything
of value in the dairy farm and all transactions involving payments and
receipts of money must be recorded.
What is dairy farm accounting?
|5 Measuring and recording:
- everything of value on your farm: animals, buildings, machines, equipment etc.
- any business or movement of money, buying, selling, borrowing etc.
Why keep accounts?
|7 Keeping accounts helps to:
- understand how you spend money and earn income
Single-entry book keeping is a simple method of accounting. A single book is maintained to enter all transactions, whether they are payments made out or income received by the farmer. (8-10)
How can you keep accounts by single-entry book keeping?
|8 Keep a single accounting book.
Your extension worker can advise you on this.
Fill in the book every day or at least every week. Enter all transactions including payments and income.
|9 Keep receipts, invoices, statements and other business documents together with a clip or in a file.|
|10 You will learn a simple method
of accounting here called single-entry bookkeeping.
- you use only one book.
It is important to note the purpose for which the payment was made or income was received. See the example in the Extension Materials opposite.
If an invoice is received from the dairy coop
(or any other purchaser of milk), only the quantity of milk and amount
of money received need to be entered in the accounts book, together with
the invoice number. The invoice must be filed separately to get the
relevant information when necessary. (11)
Make a record for each payment or income e.g.
|11 If the dairy coop or someone who buys milk
from you gives you an invoice, only record:
- amount of money received
File the invoice separately so you can get information if you need it.
Profit and loss
Even though income and expenditure are recorded daily in this manner as and when actual transactions take place, the profits (and losses) are usually calculated for longer periods e.g. for a year. For calculating profits (and losses), the items of expenditure and income during the period under consideration are summarised under three main sections: (12)
- capital items
Capital items are those having a longer life and a higher value e.g. land, buildings, equipment such as milk cans and animals. (13)
The recurrent (or consumption)
items are those that get used up in the production process e.g. cattle
feeds (both roughages and concentrates), mineral mixtures, chemicals, disinfectants,
medicines, soap, and various miscellaneous items. (14)
How can you calculate profits and losses?
|12 You usually calculate profit and loss over
a long period (e.g. 1 year).
Whereas you record payments and income from day to day.
|13 For profit and loss calculations,
keep payment and income under 3 headings:
Things with long life and high value e.g.
- feeds (roughages and concentrates)
Payments made for services such as labour, A.I. and veterinary services are also considered under recurrent items. (15)
On the income side are sale of milk or milk products, cow dung or compost etc.
Loans, instalments, interest payments
Money received on loans and payments made as loan repayment and interest charges are summarised separately for purposes of profit (and loss) and cash flow calculations. (17)
Small scale farmers may find it difficult to prepare these summaries and analyze them. Therefore extension officers should:
- encourage farmers to record each and every item of income and expenditure with relevant details;
- assist farmers to summarise them and analyze them once in 3 months, 6 months or a year. (18)
Examples of dairy farm accounts
are given in the Extension Materials opposite.
|15 Payments for services:
| 16 Income from the sale of:
|Loans, instalments, interest payments.|
|18 Consult your extension worker about:
- how to record items
How can you keep a capital account?
1 Even though land values may have gone up (appreciated) between 1.1.89 and 1.1.90, it has not been taken into account.
2 Depreciation of buildings and equipment has not been accounted for. Depreciation is the amount of money that has to be set aside to replace the buildings (in about 20 years time) or the equipment (in about 3-5 years time, depending on the type of equipment). This is a factor to be considered in an overall profit and loss account.
3 The total number of animals in the farm have been valued as of 1.1.89 and also 1.1.90.
difference between additions/purchases of animals (10,000.00) and sales
of animals (8,000) amounting to 2,000.00 (10,000.00 - 8,000.00) is added
to 30,000.00, value as of 1.1.90 should be only 32,000.00. The additional
1,000.00 could be due to a heifer on 1.1.89, calving down and starting
its lactation in 1989, thus appreciating in value.
4 Total value of capital items (assets) has gone up only by 4,500.00 (44,500.00 - 40,000.00) in spite of additions and purchases amounting to 12,500.00. This may be explained as follows:
i.e. The increase in the value of capital items by 5,500.00* (45,500.00 - 40,000.00), including additions/purchases amounting to 12,500.00* has been made possible:
How can you keep a loan account?
1 Loan may have been obtained to purchase cattle/equipment and/or construct/improve buildings.
2 Part of the investment of 9,000.00 may have come from this loan.
is also payable in addition to the outstanding loan amount.
How can you keep a current account?
from sale of animals is included as an income whereas payments for the
purchase of new animals are not included as an expenditure. The
sales result from a previous investment; the payments for new animals is
a new investment and the farmer's capital assets have increased because
of this investment.
Profit from the dairy enterprise
Net return on investment
This shows that by making an investment of 45,500.00 (19), the farmer has received an income of 14,900.00 in 1989 (after setting apart 600.00 to meet the replacement of buildings in 20 years and equipment in 5 years) i.e. a return of 32.7 % on investment. (23)
However, the time spent by the
farmer and his family have not been taken into account in this computation.
If the farmer and his family together spend about four hours a day (for
365 days of the year) on the dairy enterprise (milking, feeding, cutting
grass, washing animals and sheds, transporting milk and cattle feed etc.)
(21), the total number of hours spent in a year is 1,460. If the normal
wage rate is 5.00 per hour, the total earning from working for 1,460 hours
is 7,300.00. (22)
How can you analyze net return?
|Net return on investment
From the above accounts:
|20 and received an income of 14,900
mu in 1989 (after allowing for depreciation).
His return is
14,900 x 100 = 32.7%
|21 But the farmer and his family use their
time, they work on the farm:
- cutting grass and feeding
|22 If the farmer and his family spend 4 hours/day
for 365 days/year = 1,460 hours/year.
If the normal wage is 5 mu/hour, they should earn
Net return on labour
Another method of analyzing
the benefits is to compute the net return on labour. In this method
the capital investment is valued on the basis of the normal interest rate.
If the interest rate is 12 %, the value of the investment of 45,500.00
is 5,460.00 i.e.
You can also calculate the net return on labour.
example shows that the farmer benefits because:
that have not been taken into account are:
It is also
important to know about the timing of receipts and expenditure of money.
If money is not available from the enterprise to meet the expenditure at
the correct time, e.g. planting grass or buying concentrates, the farmer
may be forced to borrow from expensive sources (because the borrowing has
to be done at short notice). The cash flow from the above example
is shown opposite.
How can you analyze cash flow?
|23 It is important to know about:
- timing of receipts
- timing of payments.
If you do not have money to pay at the right time for planting grass, concentrates etc.
|24 you have to borrow.
If you hurry to borrow, this can be very expensive.
Here is the cash flow from the above accounts:
example, there is a surplus inflow over outflow of (44,900.00 - 37,260.00
=) 7,640.00. Therefore, it would be possible to arrange the expenses in
such a way as to avoid borrowing at short notice. (Of course, there is
an outstanding loan of 10,800.00 and a new loan of 2,400.00 which are considered
as planned borrowing at normal interest rates.