AEC 211 Midterm / Final
straight-line depreciation method
allocates the depreciable cost of an asset in equal periodic amounts over its useful life
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants elastic = sensitive to price inelastic = not sensitive to price
Strategy
- Having contingency Plans - Being on the same page - Organizational learning - Best way forward in the long run
Major Drivers of change
- New Tech - Global Trade - Climate Change - Consumers
How to achieve competitive advantage
- improve margins - create self sustaining blue ocean
payback method of capital budgeting
evaluates capital budgeting opportunities by determining the number of periods required for the sum of the benefits to equal the investment think the last project where we found the years and how much it takes to get our return
average rate of return method
evaluates capital budgeting opportunities by measuring the annual percentage return on the capital invested in a project
Current ratio
CA/CL it means you have some number of your current assets you own, if it is less than you have a problem it is liquidity solvency profitability debt repayment
Cash Flows, and cash budget Ch.8
Types of budgets power of budgets Operating budgets Cash flows budgets Cap expenditure budgets benefits and limits of budgets
incremental analysis
an analytical approach that focuses only on those costs and revenues that change as a result of a decision
Agribusinesses use insurance
as a way to protect themselves from physical risks such as fire, weather, and crop damage. however it cannot cover all risks
Forecasting prices and demand Ch.7
basics of forecasting extrapolation and graphical analysis adjust for inflation and pop seasonal patterns
Shifts in demand
change in taste/preference inverse relationship population and # of buyers
equimarginal allocation principle
compares the change in profit from using an additional input to produce one product versus another
vision statement
expresses what the organization should become, where it wants to go strategically
Discounting
finding a sum of future money in todays values future val = present val * (1+int rate)^n
Partial budgets
either/or decisions what's changing?
where to make decisions
generally, decentralized decisions are usually short period, small amount, problems
Profit as a percentage of sales ratio
measures profit as a percentage of each sales dollar; it is calculated by dividing profit before taxes by total sales
Return on invested capital ratio
measures the profit before taxes asa percentage of the value of all the assets used by the firm to earn that profit income before tax / total assets
times interest earned ratio
measures the risk of the firm not meeting its interest payments on loans income before tax + int exp / int exp
Break even
the amount of sales needed to break even FC and MC
profit maximizing production area
the area on the graph where profit curve starts to curve
diminishing marginal returns
the curve graph that decides when profit is no longer increasing like an upside-down U
cyclical pricing
this is done over years. Also remember: diversification forward contracting crop insurance Hedging
When managing an agribusiness, does the past predict the future?
to an extent, there are certain ideas that we can learn from by previous experiences and forecast the next few quarters where we can build from what we learned
GOAL OF STRATEGY
to create and sustain competitive advantage
Why should we use trend lines?
to find the average change for each period and provide a general forecast of the expected future direction of change in the variable
if income is predictable:
use straight line
price index
used for adjusting for inflation and dollars of other places
extrapolation
uses the simple idea of whatever happened in the past will happen in the future
Why do we need to use a price index
we use a price index to combat inflation essentially, if inflation rises 2% in a year, we then know to raise our prices or even expect prices to raise by 2% if they are consistent. we aren't really making any more money because the percent difference gets cancelled out with buying power
Shutdown price
when market price is les than or equal to the average variable cost break even price = Average variable cost + fixed costs
diminishing marginal utility
Decreasing satisfaction or usefulness as additional units of a product are acquired
Thinking first / rational model of decision making
Define Diagnose Design Decide
Managers are:
Decision makers
Equity
RE Contributed Capital Valuation Equity
VRIO (resource based view)
Valuable Rare Imitation organizational structure
why use sole proprietorship
you are the boss, and hire assistants
ways to organize
-By business function -By product -By geographic area
The five factors of forecasting?
1)Accuracy desired 2)time premitted to develop the forecast 3)the complexity of the situation to be explained 4)the time period to be projected 5)the amount of money available to carry out forecast
Steps to decision making
1. ID the problem 2. Determine the alternatives 3. Analyze the alternatives 4. Use best alt and judgment 5. Implement the idea 6. Follow up on the results
Porter's 5 forces
1. current competitors 2. New entrant 3. bargaining power of suppliers 4. bargaining power of buyers 5. threats of substitutes
limitations of budgets
1. they are estimates, not sure things 2. the execution of a budget is not automatic 3. Budgets cannot take place of good management 4. good budgeting requires time and patience
values statement
A brief articulation of the principles that guide a company's decisions and behaviors
partnership
A business in which two or more persons combine their assets and skills
Sole Proprietorship
A business owned by one person
Corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts
Limited Liability Company (LLC)
A company similar to a corporation but without the special eligibility requirements.
Midterm Question: What are some of the advantages and/or disadvantages of choosing a "corporation: legal business structure for an agribusiness?
A corporation is a large company "owned" by its shareholders. The advantage of a corporation is that it is A business owned by stockholders who share in its profits but are not personally responsible for its debts. also when the main guy dies, the company does not stop unlike a sole proprietorship the disadvantages are double taxation on the corporation and decentralized organization when it comes to management.
profit and loss statement (income statement)
A financial document showing a firm's income or expenditure in a particular time period
Accounts Receivable Turnover
A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.
Economics
Allocating scarce resources among competing needs
3 parts of break even analysis
Costs Output Selling price
Acid Test Ratio
Current Assets - Stock / Current Liabilities it is the ultimate test of liquidity
If asked to evaluate the "financial health" of a farm that reports all financial documents on a "cash basis", explain why you would want to make accrual adjustments to the available financial information.
Did not answer Notes:
Three Es
Efficiency Effectiveness Economic wellbeing
Amortization Method
Evaluates capital budgeting alternatives by putting everything on a yearly basis rather than comparing total benefits and total costs.
compound interest
FV =PV*(1+INT)^N N is the rate of compounding
Value costing
Historical Cost Market Value Book Value Production Costs
Midterm Question: Recall examples of specific adjustments to historic time-series price data that may be needed when forecasting future prices for your ag product. Choose one and explain how making the adjustment helps agribusiness managers improve their decisions.
I did not answer this one Notes:
Midterm Question: For the following five questions, indicate wether a fair manager should look for the information primarily on his farm's balance sheet or Pans L statement
In the current year, has the firm been profitable? PandL statement Is the firm solvent? Balance sheet A list of all financial claims on agribiz assets? balance sheets Currently, what is the value of prepaid expenses. Balance sheet the book value of a machine that has been depreciated to its salvage value? Balance sheet
Business Organization
Keep it simple, focused, lean, and accountable
4 Principles of Organizational Design
Keep the organizational structure simple Give critical tasks prominence and allow them to function without restriction Keep support staff to a minimum Keep working units small
Performance from ch. 13 and 14
Know what a Balance sheet is A=L+SE PandL statement Gross Margin = Rev-Cogs Profit and net profit Comparative statement analysis NWC analysis Ratios
Enterprise budget
Look at costs in certain enterprises revenues
Midterm Question: As noted in the book, "a SWOT Analysis is a good place to start for any new business to discover what it needs to do to be successful in a competitive market." Briefly describe the concept, "SWOT Analysis"
My Answer: " SWOT analysis is essentially a farmer asking themselves about their: Strengths: What are we good at producing? the farmer finds their strong suit and adds that to decision making Weaknesses: What do we fail at? the farmer might reduce this product to focus on things that are easier to produce. Opportunities: What new ideas/investments will make the farm better? the farmer analyzes these for feasibility Threats: What is our competition and how do we beat it? Notes: SW is internal and OT is external
Midterm Question: As an Agribusiness manager, how would you explain the difference between your role as an operational manager and your role as a strategic manager
My Answer: "a strategic manager is someone who looks at their firm and asks themselves " what are we doing correctly?" and "how can we use our data to create a plan so we don't fail?" While an operational Manager asks questions like, "Are we doing things WELL?" operational managers want to achieve peak efficiency in their firms and its their responsibility to analyze alternatives with data to reduce costs and increase profits. Notes: Remember that a strategic manager asks questions about plans, strategy, and the correct things. An operational manager asks questions about if these operations are going well and being efficient.
Midterm Question: In class we discussed a number of reasons why a manager of an agribusiness would want to create budgets. What are reasons for investing time and effort in the budgeting process?
My Answer: Budgets are a detailed future plan that helps managers see how much they need to produce to make a certain profit. it also motivates employees to achieve these written goals and be more efficient. budgets also can prevent firms from generating losses and can also make an estimate if a loan is needed. These benefits are well worth the time and effort the budget plan is essentially a plan to keep the business stable.
Midterm Question: Briefly explain how an agribusiness manager could lower the price of one of his / her products, and yet increase the total revenue for the agribusiness
My Answer: If a farmer had access to their demand schedule for their product, they would be able to see and predict if a drop in price would increase demand for that product. They could also look into the elasticity of the product to make sure demand does not drop harshly if price were to increase. Notes: review chapter. find some equation I guess?
Explain the process for determining which is "better" Getting 100k today or 200k tomorrow
My Answer: in class we discussed discounting with this problem if we took the 100 k today we get 100k of 2019 money. But in five years we get 200k of 2024 money. So find the best choice we need to discount the 200k down to 2019 money because of inflation and the time value of money. in the end the 200k was worth about 160k of 2019 money.
Real interest rate =
Nominal interest rate - inflation rate
operational / strategic
Operational: Are we doing things well? Strategic: are we doing the correct thing?
Midterm Question: how might an agribusiness manager use partial budget analysis to gain insights about which alternative to pick, given a choice between two alternatives for using a set of available assets?
Partial budget analysis allows managers to compare two pro forma budgets of two different alternatives. the manager compares the costs of each alternative, the expected revenues of each alternatives and then compares the profit and contribution margins. After the comparison, the manager picks the alternative with the lowest cost, best profit, and best margin.
Graphical analysis
Plotting data on a graph so that a manager can see what patterns are present in the data.
Enterprise budgets
See what's available as a resource
operating budget
Summarizes the expected sales, production, and profit and related costs for the next budget period.
capital expenditures budget
The budget that presents the company's plan for purchasing property, plant, equipment, and other long-term assets.
what are opportunity costs?
The cost of the other forgone alternative you lose when choosing an option. Ag biz should care because it helps with accounting for costs and making decisions. the cost can also be used for future forecasting
Net present value
The difference between the present value of its benefits and the present value of its costs
Midterm Question: Using the concepts of per unit fixed costs and per unit variable costs, explain why an agribusiness might want to produce a good even when per unit price for the good is less than total per unit costs. (i.e., Selling price < Total Cost)
The idea of variable costs explains why a business would produce when selling price is less than total costs. Eventually sales revenue, will cover variable costs and and further on pass the fixed cost because with each sale the margin between sales and fixed cost and variable costs will shrink. the product then hits the break even point and then profit is made.
Return on Invested Capital (ROIC)
The ratio of after-tax operating income to total invested capital; it measures the total return that the company has provided for its investors.
Should a farm maximize production on farmland
There is a diminishing marginal value for each unit you create. once you past the maximum amount of profit before the amount fo profit begins to decrease but still goes up then you need to stop.
Debt to Equity Ratio
Total Debt/Total Equity measures the relative size of claims on a firm's assets between its creditors and its owners
Net cash flow
Total inflows - total outflows
Managers need to ask:
What to produce - costs to start? labor and equip - Feasibility? bio and tech - Market Demand - returns? -Lifestyles and preferences?
Partial Budgets
Whats the pain and Gian of the cost objects
Midterm Question: In Production, there are 3 managerial decisions - What to produce? how to produce? and how much to produce? what are some basic concepts from economics and management that help answer the third question, How much to produce?
When asking how much to produce, managers need to think about production possibility, allocation efficiency, and diminishing marginal return. Production possibility asks if that money used to grow another rifle could be used to do something else that would be more profitable. this asks about the limit of how much to produce. Allocative efficiency is similar. It asks id we are putting our resources to good use. if producing more isn't good, we can use our resources differently. Diminishing marginal return expressed the amount of profit from what you produce. Once profit gain decreases, stop producing. The book has a graph that's shows when to stop producing.
DDB is when
You have more taxable income and you can charge depreciation to the taxable income
the balance sheet
a "snapshot" of an organization's financial position at a given moment does not show if we made a profit or not
declining balance method
a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life
inferior good
a good that consumers demand less of when their incomes increase
Strategic management
a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals
mission statement
a statement of the organization's purpose - what it wants to accomplish in the larger environment
For agribusiness, what's the role, purpose, function of having a strategy
allows farmers to plan accordingly for anything that may go wrong in the future in order to not be ruined by one single event
Inventory turnover ratio
cost of goods sold/average inventory how many times you can turnover your inventory in a year
Inventory Management Ch.12
costs Contribution sales - vc break even analysis reasons to have and not hav inventory inventory management method TC = CC +OC
the goal with contribution it to:
cover all variable costs plus art least some fixed costs
Balance sheet
current assets fixed assets current liabilities long term liabilities Owner's equity
Net Working Capital (NWC)
current assets minus current liabilities the cash available to the firm to meet day to day and unexpected expenses
Prices, Margins, Contribution, Breakeven analysis Ch. 5,11,12
demand schedules diminishing marginal return margins Break even point when NOI is 0
comparative statement analysis
horizontal and vertical comparisons are analyzed by the accountant. Horizontal Analysis-constitutes the comparison of amounts and percentages for a particular item or account over a period of two or more years. Vertical Analysis-shows percentage and total comparisons for two or more years in vertical columns on a single sheet.
Seeing first
insight model prep incubation illumination verification
capital budgeting
involves evaluating the profitability of the firms potential investments in new property, plant, and equipment.
solvency
is the assets are greater than the owner's liabilities, then the business is considered solvent
Why is population important
it can skew data. if we sell 3 inna town of 1 mil and 3 in a town of 100 on a per capita basis we see the small town likes the product more
cash basis accounting
it is single entry revenue is recorded when received expenses are recorded when paid
Why do we use cash flow budgets?
it summarizes the amount and the time we can expect cash to flow in and out of a business. we know when to buy sprays and when we get money for our crops this is cash flow
Goal of capital budgeting
know what to expect know how much you have planning and control
Management Information Systems (MIS)
needs to provide 1. accurate and timely production and cost information on all phases of business 2. data int he proper form for decision making 3. accounting information that allows for quick assessment 4. a means to efficiently and effectively monitor and control the business
Return on Owner's Equity Ratio
net income/average owner's equity
Long term commitments are almost always
non-reversible
A break even cash flow is
occurs when the discounted cash flows over the economic life of a project result in a net present value of of zero or a B/C ratio of 1.0
how do wee look to the future
organizational structure: who makes decisions, who manages what, who's accountable? learning from the past tax liabilities estate 4 succesion planning
Functions of Management
planning, organizing, leading, controlling implementing, allocating, coordinating, evaluating, adjusting
Seasonal Pricing
pricing should change during a peak season o achieve maximum profits
Why find the index
so you know the variation of price changes. using historic price trend data allows this. buy low and sell high. helps us ask questions
SWOT Analysis
strengths, weaknesses, opportunities, threats
cash flow budgets
summarize the amount and timing of cash that is expected to flow in and out of the business during the budgetary period
Production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Types of budgets
whole farm enterprise budgets partial budgets cash flow ex post