Handling finances

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Web Script for Agroentrepreneurship NC 2
Handling Finances

UNIT 1 PREPARING BUDGET PLAN
Objectives At the end of this unit, you should be able to:

Introduction 1. Explain details of the budget plan
LESSON 1 2. Identify different financial service providers
3. Analyze and select financial service providers
TOPIC 1
BUDGET PLAN
Definition of Budget Plan

Components of Budget Plan

A Budget Plan consists of the expected pattern of money coming in and going out of an
agroenterprise.

We can look at the pattern for a day, a week, a month or a year. The difference between
what comes in and what goes out determines whether we have a surplus we can save or
whether we have deficit we need to cover by using savings or borrowing.

Money coming in (income) usually results from the sale of goods (crops, livestock, wood,
processed food, etc.) or services (ploughing, etc.) but it may also result from employment
wages, gifts, rent, remittances from other family members, etc.

Money going out (expenses) will include business expenses such as fertilizer, seeds,
pesticides, equipment, livestock, vaccines, tools, goods for resale, wages, etc.

Example

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TOPIC 2 Computing Farm Costs

Farming involves the deliberate cultivation of crops or rearing of livestock. The production
cycle is the term used from the time when one starts to rear an animal or plant a crop to the
moment one can sell or use the output from that animal or crop. Production cycles have a
significant impact on how to work out the profitability of an enterprise’s activities.

In previous lessons we have already calculated the output we have projected for the
enterprise, whether it is crop or livestock. We have also identified in the production plan all
the details of the inputs needed to produce the expected output. The next step in the budget
plan is to assign value on each input and compute for the total farm costs.

Direct costs – inputs used in crop and livestock production such as seeds, fertilizers, sprays,
animal feeds and medicines. These inputs are bought and used up in the course of
production. Direct costs are also called variable costs because it vary how much are bought
according to how much are planned to be produced. Hiring people to work on a particular
crop or livestock activity, their wages are also a direct cost.

Indirect or overhead costs – Also called fixed costs, these do not change directly in relation
to how much is produced in an enterprise. Examples are salary or wages of someone who
works all year and do all sorts of different jobs on the farm, or even just one specific job like
accounting work, which is not directly related to the production. Other examples are cost of
owning machinery, rent, electricity and repair of buildings.

In order to compute the direct input costs, do the following:

1. Add the costs of inputs bought during the year and the value of purchased inputs in
store at the start of the year (waiting to be used)

2. Subtract the value of purchased inputs that are in store at the end of the year (have
not been used up)

3. Use the value of inputs at their purchase price.

Activity No.1 Computing Farm Costs

Activity Title Activity Sheet 1
Purpose : Computing Farm Costs
: To become skilled at computing farm costs

Procedures:
1. Read the three examples and calculate the farm input costs.
2. Complete the table with the correct answers.
3. Write the computations and answers on a worksheet.

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Write your name and the date work is submitted on all sheets of paper used.

1. At the start of the accounting year the farm has P1050 worth of fertilizer stored on
the farm. The farmer purchased P9800 worth and at the end of the year none left.
What is the fertilizer input cost for that year?

2. At the start of the year there is no animal feed in store. During the year the farmer
purchase some feed at a cost of 15,500 and have P375 worth left at the end of the
year. What is the feed input cost for the year?

3. At the start of the year a farmer has 200 kg fertilizer in store costing P80/kg. The
farmer then purchased 500 kg during the year for P80/kg and have left 100 kg at the
end of the year. What is the fertilizer input cost for that year?

4. Work out the input figures in this table:

Input Opening Purchases Closing Direct costs
valuation
valuation
950
Feed - 12600 -
-
Seed 6950 -

Fertilizer 10200 4750

LESSON 2 IDENTIFICATION AND SELECTION OF FINANCIAL SERVICE PROVIDERS
TOPIC 1 This lesson will walk you through the process of identifying and selecting financial service
providers

Identification of Financial Service Providers
The Role of financial service providers

Here is how a financial service provider works

Types of Financial Service Providers

Money lenders may just be using his or her savings to lend to other people. The interest the
borrowers pay is the money lender’s income.

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Banks normally collect savings from other people and lend this money out to different
people. They attract people to save by offering to pay them some interest – in effect lending
them other people’s money so the bank pays a depositor and then lends it to other people at
a higher price. The people who save want their money back of course, so borrowers must
repay to keep the system going. It works as long as banks collect more interest than they
pay. The same concept is done by moneylenders.

Not all financial service providers offer savings account to their customers. Small
microfinance institutions rely on grants and loans to lend to their customers.

Traders and input suppliers that farmers deal with also operate on the same idea. If one
defers paying for inputs until harvest time that is a financial service similar to receiving a
loan. Many suppliers will give the option of paying immediately at a discount or paying within
three months or so for an additional charge.

Credit unions, savings and credit cooperatives and some multi-purpose cooperatives
provide financial services in the form of savings accounts and loans and are regulated under
the cooperative law. They are not strictly regulated as a bank, but have to comply with rules
which ensure they manage their financial affairs in a sound manner.

Formal financial service providers are licensed and regulated by a government authority
such as the Bangko Sentral ng Pilipinas. All types of bank fall into this category – state
banks, commercial banks, rural banks, postal savings banks, agricultural banks,
development banks and so on. They have to comply with strict regulations to ensure they
remain solvent and able to safeguard people’s money.

Criteria in Selecting Financial Service Providers

1. Compatibility and trust of the farmer to the financial service provider
2. Convenience (location)
3. Security of stored cash
4. Registration under applicable laws

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Activity No. Selecting Financial Service Providers
2

Activity Sheet 2

Activity Title : Selecting Financial Service Providers

Purpose : To become skilled at analyzing options for financial service
providers

Procedure:

1. Go to your town’s business district and select three different financial service providers to
interview (You can do this on your own or in pairs).

2. Ask for the following information:

a. What types of loans are available?
b. What are the eligibility requirements?
c. What collateral is required?
d. What is the interest rate and how is it calculated?
e. Are there any other fees?
f. How is the repayment schedule decided?
g. How far is the institution from my business?
h. Do I have to join a group or attend meetings?
i. How long does it take to process the loan application?
j. Where and how can I make repayments?

3. After gathering the answers, select a financial service provider that matches your needs
and explain your decision.

4. Submit your work to your trainer. After checking, your trainer will return your work.

5. Write your name and the date work is submitted on all sheets of paper used.

Job Sheet COMPILING DETAILS OF BUDGET PLAN
No. 1

Job Sheet No. 1

Title Compiling Details of Budget Plan
Purpose
Supplies/Materials To perform compilation of details of budget plan

Information gathered from previous activities, pen,
paper, calculator

1. Go to the workshop area. Inform your trainer
that you are ready for this activity.

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Procedure: 2. Using the marketing plan with estimated
Assessment Method: production and income figures, and the
production plan indicating all direct and indirect
costs related to the business, prepare a budget
plan with the pro-forma template below.

3. Ensure that all calculations are aligned to your
assumptions

Face-to-face feedback from trainer or submit via email
and conduct online feedback with trainer

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Pro Forma Crop Budget Plan Quantity Unit Price Total Estimate

Item
Receipts
Product 1
Other
Total Receipts
Variable Costs
Fertilizer
Seeds/plants
Herbicides
Insecticides
Harvest
Other
Fuel
Labor
Transport
Total Variable costs
Fixed costs
Repair and maintenance
Utilities
Interest on loans
Salaries
Land Charge
Management
Others
Total fixed costs
Total Costs
Returns
Gross margin (returns over
variable costs)
Net returns

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Pro Forma Livestock Budget Plan Quantity Unit Price Total Estimate

Item
Receipts
Livestock
Other
Total Receipts
Variable Costs
Cost of livestock
Feed
Labor
Other variable costs
Veterinarian and medicine
Total Variable costs
Fixed costs
Salaried labor
Equipment
Building
Management
Breeding
Utilities
Misc. expenses and supplies
Interest on operating capital
Total fixed costs
Total Costs
Returns
Gross margin (returns over
variable costs)
Net returns

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UNIT 2 APPLYING BUDGET PLAN
Objectives At the end of this unit, you should be able to:

Introduction 1. Identify and comply with membership requirements
LESSON 1 2. Explain the loan process and requirements
3. Discuss loan amortization and settlement of other financial obligations
TOPIC 1
MEMBERSHIP AND LOAN REQUIREMENTS
Review of Financial Service Providers

Membership and Loan Requirements

Preparation of membership requirements

Banks

To open an account, one has to find the Account Manager. Account managers meet with
prospective customers to discuss their banking needs and recommend types of accounts
that would be appropriate. If a customer decided to open an account, the account manager
will provide the necessary forms and advise what documents are needed.
Every new customer has to fill in an application form. The usual questions include name,
address, date of birth, telephone number and occupation. A photograph is needed and
signature on the form. In addition to the application form the bank will require some
documents to prove who the person is and their address. Any government ID or passport or
a utility bill to provide evidence of address. Some account one will need to make an initial
deposit to complete the opening procedures.

Cooperatives

In order to join a cooperative, one has to have a common bond on such as locality or a rice
farmer or part of a company. Once this criterion is met, the next step is to fill in an
application form. Proof of identity and minimum age will have to be produced to open an
account. Some cooperatives need a recommendation from an existing member.
Membership fee and minimum deposit will be paid. As a member, one will be invited to
attend the Annual General Meeting and expect to receive a dividend or share of the profit
based on the amount one has deposited in the share account. Once one has established
oneself as a member with good standing, only then will be eligible to apply for a loan.

Microfinance institutions (MFI)

MFIs often have a specific target audience for their services. Many focus specifically on
women. They also have specific ways of working with their customers and often expect
them to be part of a group and attend regular weekly meetings. The most common service
offered by small MFIs is access to small loans but many offer non-financial services such as
business training or advice on health and nutrition as well. To make use of MFI services one
simply need to fit the client profile and be willing to follow their procedures. Their products,
procedures and facilities are similar to that of a bank.

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Activity No.1 Preparing Membership Requirements

Activity Sheet 1

Activity Title : Preparing Membership Requirements

Purpose : To become skilled at preparing membership requirements

Procedure:

1. Based on previous interview with the selected financial service provider, prepare a list of
requirements for membership of the institution.

2. Compile copies of the necessary documents required for membership on a folder.

3. Write your name and the date work is submitted on all sheets of paper used.

TOPIC 2 Loan Process and Requirements

Loan Requirements

Detailed application form, providing details of income and expenditure and reason for taking
a loan. Other documents include those that tell more about the business and how it is
managing the money, specifically the following:

 A cash flow plan
 A balance sheet
 A cash book.
Again, for most financial service providers, one needs to have held an account for a certain
amount of time as supporting document as well.

Collateral – is some form of property that one is willing to pledge to the institution, so that
they can take that property and sell it to recover the loan in the event that one cannot repay
it.
Some institutions accept third party guarantees as collateral. This means that someone
other than the borrower accepts the obligation to repay a loan in the event that the borrower
fails to do so. This type of guarantee forms the basis of the solidarity group method widely
used by microfinance institutions.

If a borrower has a savings account, this may be accepted as collateral for a loan. Financial
service providers rely on credit history of their customers when deciding whether or not to
lend to a client and how much to lend. First time borrowers will generally only be give a
small loan and, if this is repaid in fill as and when installments fall due, the customer
becomes eligible for a larger loan. If further loans are taken and repaid promptly, the client
will build up a good credit rating.

It is best to look at brochures or flyers of financial service providers that list down the types
of loan products on offer. They usually have business loans and special loans for farmers or
those in agriculture.

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Activity No. Basic Loan requirements
2

Activity Sheet 2

Activity Title : Preparing basic loan requirements

Purpose : To become skilled at preparing documents needed for loan
application

Procedure:

1. Based on previous interview with the selected financial service provider, make a list of
requirements needed for loan application

2. On a folder, compile all copies of necessary documents based on the list of requirements
for loan application.

3. Submit your work to your trainer. After checking, your trainer will return your work.

4. Write your name and the date work is submitted on all sheets of paper used.

LESSON 2 FINANCIAL OBLIGATIONS
TOPIC 1 This lesson will walk you through the details of financial obligations

Financing Terms and Obligations

Loan term is the length of time one is given to repay a loan in full, including interest
charges and any other fees. Terms can vary from a few months to a few years.

Once a loan has been identified, one needs to consider the costs that are involved.
Direct costs are those which you pay the lender such as application fees and interest
rates.
Indirect costs include such transport costs to get to the institution or to attend meetings
and the time spent on dealing with a financial institution.

Some microfinance institutions calculate interest on what is known as a flat rate basis.
This means that the borrower pays interest on the original loan amount for the full
duration of the loan. If the loan is to be repaid in one installment at the end of the loan
terms, the flat rate will be the same as the quoted nominal rate. For example a loan of
P12,000 taken for a year at 12% interest and repaid in full at the end will incur an
interest charge of P1440 – exactly as one would expect.
However, if this loan were paid in monthly installments, the situation would be quite
different. A flat rate calculation will mean that one pays P1440 interest (120 per month)
but one will owe substantially less than P12000 as the year progresses. Look at this
table:

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Month Loan Outstanding Monthly Repayment Monthly interest

0 Php Php Php
1
2 12000 0 0
3 11000 1000 120
4 10000 1000 120
5 1000 120
6 9000 1000 120
7 8000 1000 120
8 7000 1000 120
9 6000 1000 120
10 5000 1000 120
11 4000 1000 120
12 3000 1000 120
2000 1000 120
1000 1000 120

0

If one is really paying 12% interest per year (which equals 1% per month) on the amount
one owes, in month 7 for example, one only owes P5000 and should, therefore, be
paying P50 in interest (1% of 5000). If we workout the interest rate one has really paid
on the loan above, it is 21.5% per year not 12%.

If interest is calculated on the reducing balance of a loan, the nominal interest rate
should be close to the actual rate that one pays. In the previous example, the monthly
payment of loan principal plus interest would be P1065 instead of P1120, if the interest
is based on the reducing balance and one would only pay P780 instead of P1440 in total
interest.

Most formal financial service providers use the reducing balance method to calculate
interest. However the interest rate alone does not necessarily portray the accurate cost
of taking a loan. An institution may charge a fee for processing the loan application or
subtract a commission for providing the service. These charges may be deducted from
the loan, so if one borrows P1000, one may only get P9500 to use.

In the previous example of borrowing P12000 at 12% interest rate payable in one
installment at the end of the year, a 5% commission deducted from the loan will increase
the effective interest rate from 12% to almost 18%.

The effective interest rate (EIR) is calculated as follows:

Amount paid in interest and commission x 100
Principal amount received by borrower

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TOPIC 2 Loan P12000
12% interest = P1440
5% commission = P600
Amount received after commission deducted = 11400

EIR = P1440 + P600 x 100 = 17.9%
P11400

If the financial service provider requires one to deposit a certain amount in a savings
account or purchase an insurance policy to cover possible default, these too are
additional financial costs.

Settling loan amortization
When one takes a loan, one is under an obligation to repay according to the agreed
schedule and one does not, one becomes a defaulter.

One way to minimize the impact of repayment problems is by preparing a good cash flow
plan and looking at any contingency to prepare back-up strategies. It is important to make
sure that one does not borrow more than one can comfortably expect to repay, even when
conditions are bad.

Monitor the cash book carefully. Check if the business is sticking to the budget or spending
more than what is intended.

What should one do if one finds out that they are unable to repay a forthcoming loan
installment?

The most important thing is to go and talk to the financial service provider where the loan
was taken. They are likely to be sympathetic if the cause of the problem is an unexpected
weather event such as drought or a storm which has reduced the business’ income. If there
is a plan, the financial service provider may consider rescheduling the loan.

Rescheduling means that the bank or institution will offer a new repayment plan. It may
extend the loan term and possibly offer a moratorium on repayments until the income is
expected to improve.

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Job Sheet SETTLING LOAN AMORTIZATION
No. 2

Job Sheet No. 1

Settling Loan Amortization

Title Settling Loan Amortization
Purpose
Supplies/Materials To prepare a loan amortization settlement

Procedure: Activity sheets prepared from previous modules, bond
paper, pen, calculator
Assessment Method:
1. Go to the workshop area. Inform your trainer that
you are ready for this activity.

2. Prepare a loan amortization schedule based on
the selected financial service provider and the
budget plan developed for your enterprise. Bear in
mind the proportion of the loan and the equity
you will input as owner of the business. You may
use a 12-month or a 5-year

Face-to-face feedback from trainer or submit your
output online and schedule an online feedback
session.

UNIT 1 INVESTING FARM INCOME
Objectives At the end of this unit, you should be able to:

Introduction 1. Explain the importance of savings
LESSON 1 2. Compute net income, dividend, patronage refund and interest on savings
3. Identify and select investment options

FARM INCOME
Importance of savings

Savings allow a person to use money in a hurry if one needs to. There are many methods or
ways of saving. Having to sell livestock or land takes time, so those methods are better for
longer term savings, although small livestock can be sold quite quickly. Livestock are good
because they grow in value and may also provide a food source such as milk, but they can
also die and leave one with nothing. Cash does not increase in value if kept at home but it is
immediately available for use. On the other hand it can easily be stolen.

The main advantage of using a bank to keep a business’ money is the security it provides. It
also enables a person to separate business transactions from personal spending more
easily.

On a personal level, there are many reasons why one should save.

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TOPIC 1 Computation of Net Income, dividend, patronage refund and interest in savings

Net Income is simply calculated as sales minus cost of goods sold, selling, general and
administrative expenses, operating expenses, depreciation, interest, taxes and other
expenses.

Net income is a useful number for investors to assess how much revenue exceeds the
expenses of an organization, and is an indicator of a business’ profitability. It appears in the
income statement.

Net Income = Total Revenues – Total Expenses*

*(Cost of Goods Sold + Expenses)

Dividend = Average Share x Dividend Rate
Example: A member with P54,000 capital share with P400 monthly contribution, and a
dividend rate of 4.74%

Months Monthly Balances
January Php54,000.00
February 54,400.00
March 54,800.00
April 55,200.00
May 55,600.00
June 56,000.00
May 56,400.00

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June 56,800.00
July 57,200.00
August 57,600.00
September 58,000.00
October 58,400.00
November 58,800.00
December 59,200.00
Total Php 792,400.00
Average Share (divided by 12) Php 66,033.33
Dividend (Ave. Share x 4.74%) Php 3,129.98

Patronage Refund is the amount returned to individual members who patronize the goods
and services of the cooperative in proportion to their individual patronage

Patronage Refund = Interest Paid by Member x Patronage Refund Rate

Example: If a member paid total interest of Php5,500 on his loans, and the declared
Patronage refund rate is 37.12%, then

Patronage Refund = Php5,500.00 x 37.12%
Patronage Refund = Php2,041.12

Interest rate in savings deposit can go as high as 2% per annum or as may be determined
by the majority of the Board of Directors of a cooperative/bank.

Activity No.1 Computing net income, dividend, patronage refund and interest on savings

Activity Title Activity Sheet 1
Purpose : Computing net income and others
: To become skilled at computing net income and others

Procedure:

1. Using the activity sheets from the previous lessons on this module, compute for the
projected total net income of your business enterprise.

2. If you have become a member of a multipurpose cooperative and have raised a share
capital of P30,000 by January with a monthly contribution of P500, compute for Total
Share capital by December, Monthly Average Share and Dividend Share if the board of
directors decided to use 4.5% dividend rate. Write your answers on a schedule.

3. Based on the previous activity sheet on loan amortization settlement, if you choose to
loan the computed amount from a cooperative using the existing interest rate, how much

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LESSON 2 would be the patronage refund if the rate is 35.25%? Show your computations.
TOPIC 1
4. Write your name and the date work is submitted on all sheets of paper used.

INVESTMENT OPTIONS
This lesson will walk you through the process of identifying and selecting investment options

Investment options

Acquisition of additional assets

If you plan to invest a large amount of money, it is important that the business increase the
output in some way or reduce other costs such as labor, to offset the extra costs of
machinery ownership and use. These extra costs may well include interest charges, if the
business decides to borrow the money needed to purchase the equipment.

When buying a tool, a machine or some animal, the business has to pay the price of the
seller. Although the amount of the asset can be spread over a number of years, the
business has to have the full amount to make the purchase. This can be difficult.

When the business decides to purchase a piece of asset, one needs to make a cash flow
plan or budget to see if the business is able to save up enough money to buy it. A budget
plan will also show the business whether it is able to pay for repairs and save up enough
each year to replace the equipment when it is worn out. This means that the depreciation
cost has been computed for.

The plan shows whether the business should be able to cope with this particular investment
and repay the money the business has borrowed, together with the interest or not. It can
also predict if the business has enough cash to meet the expenditure requirements of the
next production season.

Farm Expansion

Questions to ask oneself regarding farm expansion:
a. Could you be growing more profitable crops?
b. Could you increase the yield of your crops?
c. Could you expand the area you plant?
d. Could you sell at higher prices or buy inputs more cheaply?

Remember: take note of price trends, market demand for new products or new varieties.
Also, estimate the input costs and output value expected from a new crop or livestock and
compare the projected profit with that from your existing crops. Skills in budgeting is useful
in examining the computations and projections made.

Tips in Farm Expansion:
a. Compare the business situation and results with other farmers to work out and
improve production methods and yield
b. Expansion of area of crops means depending on machines or animal power

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c. Think about the market and place much effort into selling the produce as growing
it.

d. Improving the quality of products lead to higher prices. This could involve value
adding activities such as choosing a different variety, grading, sorting, improving
storage conditions and using better packing materials.

e. Storing produce for longer enables the business to sell when prices are higher.
Another option is to transport produce to a place where demand s higher, or
collaborate with other farmers and negotiate jointly with dealers to get better
prices

Diversification

Diversification – is a strategy that mixes a wide variety of investments within a business.
This means it contains a mix of distinct asset types in an attempt at limiting exposure to any
single asset or risk. This may lead to opening a new enterprise that is not connected to the
current line of products and services.

When starting a new enterprise that may be completely unrelated to the existing business’
products or services, it is important to estimate how much profit the enterprise is likely to
make. Once again, budget skills to estimate the profitability of diversified product or service
is important.

Remember that in a budget assumptions in what inputs to use, how much the products will
sell and what price will be used are crucial. This means that marketing information and price
estimates are based on accurate sources.

It is also important to consider whether introducing a new enterprise means giving up all or
part of another. If this is the case, the business would have to compare the projected new
income with the one the business is giving up to ascertain that it is a wise and feasible
decision.
Investment options

When the business decides to take in a particular investment option, it means the business
is tying up its money in that asset.

In business, one always faces choices about what to do and what to invest in, and have to
consider if the profit it will make is enough. If the business commits significant amounts of
money into the purchase of machinery, one should expect to generate a return that is at
least as good as investing the money in an alternative activity.

This means that money always has an opportunity cost- that which it could have earned if
invested in something else. The simplest comparison one can make is to imagine the
business had invested the money in a bank savings account. How much interest would it
have earned?

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The business needs to calculate this opportunity cost the way machinery ownership cost is
computed. After computing the rate of return, then a comparison can be made – either to
purchase new assets, to expand the farm, or diversify to a completely new business. The
important thing is to be sure that the investment option will enhance the business further and
improve the livelihood of the stakeholders.

One can also use the SWOT Analysis method (Strength, Weakness, Opportunities, Threat)
to list and study the investment options before making a decision.

Job Sheet INVESTMENT PLAN
No. 2

Job Sheet No. 3

Title Preparing an Investment Plan
Purpose
Supplies/Materials To prepare an investment plan
Procedure:
Activity sheets from previous modules, calculator,
Assessment Method: pen, bond paper, folder, stapler/fastener

2. Go to the workshop area. Inform your trainer
that you are ready for this activity.

3. Write down at least two (2) investment options
that your business may take.

4. Using information available online or thru
contacts, prepare a budget plan for each option
and write a brief analysis as to the opportunity
cost and its strengths, weakness, opportunities
and threats.

5. In a separate page, write which investment you
would select and explain in at least 200 words the
reasons behind your decision.

Face-to-face feedback from trainer or submit online
then schedule online feedback with trainer

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