Decision Tools for Primary Industries

For OSEs

What does a partial budget do?

Looks at the effect of one decision on your overall budget

What is the law of diminishing returns?

After a certain point, putting more input into something gives you less profit as a result. There will come a point where putting one more unit of input costs more than it helps.

At what temperature does Nitrogen turn to gas, and why is that important?

over 20 degrees celcius, because you need moisture to dissolve it and keep it available for your crops. If it gets to the water evaporation temperature though it’ll steam out with the water.

What is Marginality?

The additional value of something.

What are two ways to add value?

Sell or produce things above the variable cost of production

What do they mean by variable cost of production?

The costs that are not fixed and unchanging

What is penetrative pricing?

Selling items at lower prices than your overall costs on the assumption that you will eventually sell enough of them at that price to cover your costs

Sunk Cost

Costs that have already been spent

What is the rule of marginality?

Marginal costs = Marginal revenue

What are some examples of Rules of Thumb?

Protect capital stock at all cots, ensure pasture cover targets are met

Why would one use a Rule of Thumb over Marginality?

Some decisions are too complex to be analysed using the concept of Marginality (MC=MR)

True or False, you should only operate with a highest and lowest possible cost when doing a partial budget

False, you should have a low, medium, and high cost in mind

What is depreciation

How an asset loses value over its lifespan

When should an asset be put on an asset register and be tracked for depreciation?

Anytime it costs more than $500 and will be attached to your business longer than 12 months.

Where do you find your depreciation rates?

Sometimes IRD will have them

How do you calculate diminishing value?

Take the (depreciation rate x the current value) off of the value of the item at the end of the year. The next year, do (depreciation rate x that value) and so on.

What is the difference between Diminishing Value depreciation and Straight Line depreciation?

Diminishing value has a slower rate of depreciation over time, straight line depreciation means that it diminishes by the same amount every year

What is Straight Line depreciation?

Subtract (depreciation rate x the starting value) from the current value every year

When would you use Diminishing depreciation over Straight Line depreciation?

When you will be using that asset for a long time

When would you use Straight Line depreciation?

When you intend to resell the asset after a shorter period of time

What is an incremental expense?

expenses solely coming from the addition of the proposed asset e.g. added electricity, depreciation, interest, opportunity costs, harvesting, maintenance, parts, water, etc.

What is opportunity cost?

When you make a choice it’s everything you didn’t choose

What are the most common loan terms for plants and equipment?

5 years. Maybe 7, but that’s less common

What does a Discounted Cashflow look at?

Looks at an investment over its lifespan, only deals with the cash

True or False: Discounted Cashflows done more frequently in a business than nearly any other financial spreadsheet

True

What is IRR?

The rate of return from the investment

What is NPV?

The net value of the investment at the present time given the required rate of return of investment

True or False: Depreciation is counted in a discounted cash flow

False: depreciation is a non-cash expense and discounted cash flows only deal with cash

In which year of a discounted cashflow do you enter the cost of the investment?

Year zero, you enter the entire cost of the investment as a negative

Why do we enter the entire cost of the investment as a negative in year zero of a discounted cashflow?

Because all assets are paid for up front using cash and loans

How would you calculate the Net Present Value?

Add together all positive cash, subtract all negative cash (add back any subtracted loan interest and depreciation and only subtract the TOTAL loan payment) and multiply the result by the internal rate of return All cash - All costs * IRR

True or False: In a discounted cash flow money you received 12 months from now is worth less than money received now

True, this is due to inflation reducing the value of a single dollar over time

How do you calculate the value of your principal over time?

Year 1 would be principal/1*rate of inflation, Year 2 would be principal/1*rate², Year 3 would be principal/1*rate³ and so on.

Say the government releases a bond and are going to pay you $20,000 5 years later. If you want a 10% return how would you calculate what to offer for that bond?

Divide $22,000 ($20k + 10%) by 1.1^5 (five years makes the exponent 5).

How would you calculate a return on investment in Excel?

=IRR(cells:cells, return%) OR =NPV(return%, cells:cells)

Salvage Value

The value of the asset at the time of sale. It’s discounted in the cash flow to year zero

What are some sources that a farmer can use to finance a large purchase?

Personal savings, selling something, loans, trade-ins, hire purchase

Equity

Contribution from the business owner from their own savings or capital. Equity owners could just be people who buy shares in the business

Debt

Money that’s borrowed and owned.

What are some common sources of debt?

Financial institutions, family, loan sharks

True or False: People cannot be both equity owners and lenders to the business

False, people can be both equity owners and lenders to the business

What is the opportunity cost of equity?

Anything that could have been done with the funds if they were not being invested in this farm or other capital purchase

What is the opportunity cost of debt?

The interest rate

What drives the interest rate?

The perceived risk of the investment and the borrower from the lender’s perspective

True or False: All the money that people are borrowing has to come out of the cash flow

True

True or False: Banks generally keep the same interest rates from borrower to borrower based on the Fed, and due to government subsidies overdraft rates are generally fairly low

False: The banks charge different farmers different rates based on perceived risk, and overdraft rates can be quite high. Upwards of 12%

Principal

The amount borrowed

Interest

The cost of borrowing expressed as a percentage multiplied against the principal

Principal (capital) payment

the amount paid towards the principal borrowed. The payment does not include interest.

Mortgage

A registered document that specifies property as security for a loan. A secured loan.

Mortgagee

the lender

Mortgagor

the borrower. (I can’t not read that with two hard g’s)

Table Loan/Term Loan

Payment totals including both interest and principal are the same every payment period

Reducing Loan

principal payments remain constant, but the interest payment falls

Interest Only loan

Only interest payments are made, the principal is paid off lump sum at the end of the life of the loan

Revolving loans

There is an upper limit on borrowing - the borrower can use all or none of the loan (usually has an overdraft facility)

Hire Purchase

The capital item is not owned until the last payment is made. Rent to own.

What is the Interest Amount?

The amount on top of the principal payment that you pay due to the interest rate

Why do we separate interest and principal repayments?

Interest is a tax deductible expense. This also applies to current account interest.

Are principal payments tax deductible?

Nope. Sad emoji.

True or False: Principal payments are in both the CFB and the CFFB

True

What information do you need to know about a loan for a budget?

The loan period, the loan amount, the interest rate (annual or effective), the number of payments per time period (once a year, 12 payments a year etc.)

What is a Fixed Rate?

It’s the same interest for a period of the loan. It could be part of the loan period or the entire loan period.

Floating Rate

Changes with changes in the interest rates set by the central bank or lending institution.

True or False: The number of payments per period increases the interest cost

False. The number of payments per period decreases the interest costs.

What is interest paid on?

The reducible principal

What are some kinds of loan fees?

Establishment fee, competition fee, early repayment fee

Why would a bank charge an early repayment fee?

Because if you pay the loan off early, they will not be getting the potential interest payments from you that they would over the expected loan period.

Should you borrow enough to pay the GST on the capital item?

It’s up to you, but if you do you’re paying interest on the GST amount which kinda sucks.

What are some special characteristics of employee recruitment in NZ?

It’s mostly the farmer that is involved in both production in management, They’re mostly family businesses, and the industry is pasture based.

“___” is critical for profitable farming

Productivity

What is a Key Performance Indicator?

They’re how we analyse the profitability of the business

What are some funky characteristics of the NZ dairy industry?

Staff must move through a progression of employment positions, into sharemilking, into farm ownership. The workforce is mobile and tend to move jobs frequently

True or False: NZ has enough low-skill labourers to cover needs

False, NZ has a small population in general

True or False: Te Tiriti O Waitangi is important regarding employment in NZ

True. Do not get this one wrong or I will ridicule you.

What is HR Management?

the activities and processing to affect utilisation of all employees in order to achieve the organisation’s goals

What are some other words for employees?

Staff, personnel, HR, human assets, human capital, people, and talent

What are the two most essential traits for an HR Manager?

Ethics and Empathy

What is the Low Cost Strategy?

employing young people at low cost

What are some issues with the Low Cost Strategy?

low work performance, high staff turnover, breakages, absenteeism, low motivation, no loyalty or longevity

What is the Training Focused Strategy?

Develop a reputation for providing high quality training for staff

What are some problems with the Training-focused Strategy?

Attracts high quality staff, but has high staff turnover as they move on to better positions

What is the High Commitment Strategy?

A long-term strategy to build employee commitment and have them grow with the business

Why should we be careful with who we hire?

It’s hard to fire people

What are the two sub processes of employee hiring?

Recruitment and Selection

What are the components of Recruitment?

Planning, job analysis, job description writing, selection, and orientation

What are some external factors that influence Human Resource Management?

Legal, customers, unions, employees, the labour market, politics, society, globilisation, the economy, the industry, technology, GLOBAL PANDEMICS

What goes into Job Analysis?

Determine your target candidate, what work needs to be done, the behavioral requirements, tasks, duties, skills, knowledge, and personal attitudes.

What are Competencies?

Knowledge, Skills, Attitude (KSA)

What sort of attributes are NOT ok to consider in personnel selection processes?

family, gender, sexuality, race, age

What Act mandates that certain personal attributes cannot be considered in the hiring process?

Human Rights Act 1993

What is a Job Description?

An internal document that clearly sets out the essential job requirements, job duties, responsibilities, skills required for performance, specifics on how success is measured in the role, title, essential functions, reporting environment.

True or False: a Job Description requires constant revision

True. It needs to develop with the position and the employee

What is a Personal Specification?

It sets out the minimum eligibility requirements for performing a job e.g. qualifications, experience, job-specific capabilities, personality traits, and physical attributes. Can be combined with the Job Description.

Attainments

Qualifications, experience, positions held

Soft Skills

e.g. Relationship building, public speaking, time management etc

Job Specific Capabilities

E.g. use of software, pasture management, milking, body condition, dagging, team management

What are some examples of Personality Traits you can think about for a Personal Specification?

proactive, patient, motivated, strong attention to detail, good time management, empathetic,

What are some examples of physical attributes you might look for in an employee?

Height, eyesight, able to lift over 40 kilos

How can we check if an employee meets the specifications?

CVs, Application forms, interviews, qualification checks, references, health and drug testing, cognitive ability checks, work sample tests, psych profiles, personality tests, background checks, written/oral/mathematical tests