Module 6: Decisions for Doing Good Business

How to do good business?

In this section we will see the possible improvements and how to make good decisions. We will use our results and do the same calculations for improved techniques.

Unit Cost: This is the money spent to produce 1 unit of output. To calculate the
unit cost the total money out (total variable cost) per ha of production is divided by the total yield realized from that ha of production. Unit Cost = Variable cost (GHC) Yield (Kg) The unit cost helps the farmer to determine how much it costs him/her to produce every unit of produce and therefore, he/she can already determine how much to sell his/her produce or if the product price is already known to him/her, it helps to decide if producing and selling the product is profitable.

Labour Productivity: It is a measure how much of the total money-in (also called
the total income or the gross revenue) resulted from the use of labour BUT not inputs. That is, if a farmer uses 1 man-day of labour, how much income does this 1man-day provide. Therefore, the more income 1 man-day gives, the more productive is the use of that labour. Labour productivity = Gross revenueInput costs (GHC) Total labour needs (MD) The labour productivity helps the farmer to know how labour needs affect his/her profits. The higher the labour needs, the lower the profits, therefore enterprises that require more labour should provide more income or should have less input cost in order to remain profitable.

Capital Productivity: it is a measure of how the profit obtained from an enterprise per production compares with the money spent on that enterprise. It seeks to answer the question for every 1 GHC that I invested in the enterprise how much profit/loss did I make in return? Capital Productivity = Gross margin (profit/loss) (GHC) Variable cost (GHC) The capital productivity helps the entrepreneur to decide the profitability of an enterprise as compared to the money he/she invests in that enterprise for the season.
Module 6: Decisions for Doing Good Business 41

Exercise: 5
Gross margin: 1 ha of chili pepper (Legon 18 variety), using current practices
Activity Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of chili pepper (Legon 18 variety), using best practices

Quantity Price [GHC] Total

Money-out: Inputs
Seed Herbicide: Round-up Fertilizer: NPK Insecticide: Consider Fungicide: Victory Input Cost [A] GHC Kg Liter 50kg Liter 100g 0.5 0 0 3.75 15 120.00 8.00 56.00 4.00 2.00 60.00 0.00 0.00 15.00 30.00 105.00 0.5 0 0 3.75 15 120.0 0 8.00 56.00 4.00 2.00

Money-out: Labour
Land preparation Nursery operation Herbicide spraying Transplanting Weeding Fertilizer application Insecticide spraying Fungicide spraying Harvesting MD MD MD MD MD MD MD MD MD 17.5 5 0 15 30 0 15 15 97.5 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 87.50 25.00 0.00 75.00 150.00 0.00 75.00 75.00 450.00 937.50 1,042.50 3500 0.90 3500 0.9 3,150.00 2,107.50 6500 6500 0.90 0.90 35 5 2.5 15 30 12.5 15 6 121 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Labour need and Cost [B] GHC Total Money-out [A + B] GHC Yield Price Money-in [C]
kg GHC/ kg GHC

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

42

Exercise: 6 Gross margin: 1 ha of maize, using current practices

Activity Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of maize, using best practices

Quantity Price [GHC] Total

Money-out: Inputs Seed Fertilizer: NPK Urea Insecticide Jute sack

Input Cost [A] GHC Kg Bag Bag Liter Sack 22.5 0 0 3 25 1.00 39.00 35.00 12.00 2.50 22.50 0.00 0.00 36.00 62.50 121.00 22.5 5 2.5 3 25 1.00 39.00 35.00 12.00 2.50

Money-out: Labour
Land preparation Planting Weeding Fertilizer application Harvesting Threshing storing bagging MD MD MD MD MD MD MD MD 18 13 23 0 8 6 6 4 5.00 5.00 5.00 4.00 5.00 4.00 4.00 4.00 90.00 65.00 115.00 0.00 40.00 24.00 24.00 16.00 18 13 23 10 10 8 8 5 5.00 5.00 5.00 4.00 5.00 4.00 4.00 4.00

Labour need and Cost [B] GHC Total Money-out [A + B] GHC Yield Price Money-in [C]
kg GHC/ kg GHC

78

374.00 495.00

1100 0.50 1100 0.50 550.00 55.00

3000 0.50 3000 0.50

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

43

Exercise: 7

Gross margin: 1 ha of mango, (250 trees) using current practices

Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of mango, (250 trees) using best practices

Quantity Price [GHC] Total

Activity

Money-out: Inputs
Insecticides Pheromone traps Fungicide: Kocide Fungicide: Pele Fungicide: Agrithane Weedicide Bactericide Foliar fert. + Kelik K Fert.: Asasewura Manure Potassium Nitrate Fruit master Water Input Cost [A] GHC Liter No. Sachet Liter kg Liter Kg kg 50 kg 25kg Kg Kg 3 12 25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.00 16.00 7.50 0.50 30.00 5.00 12.00 12.00 16.50 28.00 3.00 4.00 4.50 1.00 48.00 90.00 12.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.00 159.00 9.00 12.00 0 5.60 4.00 3.00 9.00 9.00 7.50 50.00 26.00 4.80 9.00 15.60 7.50 0.50 30.00 5.00 12.00 12.00 16.50 28.00 3.00 4.00 4.50 1.00

Money-out: Labour
Fire belt Pesticide spraying Fertilizer application Weeding Maintenance pruning Scouting/fruit drop Harvesting Labour need and Cost [B] GHC MD MD MD MD MD MD MD 10 48 0 13 4 12 4 5.00 5.00 5.00 5.00 5.00 5.00 5.00 50.00 240.00 0.00 65.00 20.00 60.00 20.00
405.00

10 144 80 10 20 10 24 298

5.00 5.00 5.00 5.00 6.00 5.00 5.00

MD

91

Total Money-out [A + B] GHC Yield Price Kg

GHC/kg

564.50 10000 0.30 10000 0.30 3,000.00 2435.50 44

35000 35000 0.45 0.45

Money-in [C]

GHC

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

Solution: 5
Gross margin: 1 ha of chili pepper (Legon 18 variety), using current practices
Activity Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of chili pepper (Legon 18 variety), using best practices

Quantity Price [GHC] Total

Money-out: Inputs
Seed Herbicide: Round-up Fertilizer: NPK Insecticide: Consider Fungicide: Victory Input Cost [A] GHC Kg Liter 50kg Liter 100g 0.5 0 0 3.75 15 120.00 8.00 56.00 4.00 2.00 60.00 0.00 0.00 15.00 30.00 105.00 0.5 0 0 3.75 15 120.0 0 8.00 56.00 4.00 2.00 60.00 40.00 280.00 15.00 30.00

425.00

Money-out: Labour
Land preparation Nursery operation Herbicide spraying Transplanting Weeding Fertilizer application Insecticide spraying Fungicide spraying Harvesting MD MD MD MD MD MD MD MD MD 17.5 5 0 15 30 0 15 15 97.5 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 87.50 25.00 0.00 75.00 150.00 0.00 75.00 75.00 450.00 937.50 1,042.50 3500 0.90 3500 0.9 3,150.00 2,107.50 6500 6500 0.90 0.90 5,850.00 4,215.00 35 5 2.5 15 30 12.5 15 6 121 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 175.00 25.00 12.50 75.00 150.00 62.50 75.00 30.00 605.00 1210.00 1635.00

Labour need and Cost [B] GHC Total Money-out [A + B] GHC Yield Price Money-in [C]
kg GHC/ kg GHC

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

45

Solution: 6 Gross margin: 1 ha of maize, using current practices

Activity Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of maize, using best practices

Quantity Price [GHC] Total

Money-out: Inputs Seed Fertilizer: NPK Urea Insecticide Jute sack

Input Cost [A] GHC Kg Bag Bag Liter Sack 22.5 0 0 3 25 1.00 39.00 35.00 12.00 2.50 22.50 0.00 0.00 36.00 62.50 121.00 22.5 5 2.5 3 25 1.00 39.00 35.00 12.00 2.50 22.5 195 87.5 36 62.5 403.5

Money-out: Labour
Land preparation Planting Weeding Fertilizer application Harvesting Threshing storing bagging MD MD MD MD MD MD MD MD 18 13 23 0 8 6 6 4 5.00 5.00 5.00 4.00 5.00 4.00 4.00 4.00 90.00 65.00 115.00 0.00 40.00 24.00 24.00 16.00 18 13 23 10 10 8 8 5 5.00 5.00 5.00 4.00 5.00 4.00 4.00 4.00 90 65 115.00 40 50 32 32 20

Labour need and Cost [B] GHC Total Money-out [A + B] GHC Yield Price Money-in [C]
kg GHC/ kg GHC

78

374.00 495.00

444 847.5 3000

1100 0.50 1100 0.50 550.00 55.00

0.50 3000 0.50 1500 652.5

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

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Solution: 7

Gross margin: 1 ha of mango, (250 trees) using current practices

Unit Quantity Price [GHC] Total

Gross Margin: 1 ha of mango, (250 trees) using best practices

Quantity Price [GHC] Total

Activity

Money-out: Inputs
Insecticides Pheromone traps Fungicide: Kocide Fungicide: Pele Fungicide: Agrithane Weedicide Bactericide Foliar fert. + Kelik K Fert.: Asasewura Manure Potassium Nitrate Fruit master Water Input Cost [A] GHC Liter No. Sachet Liter kg Liter Kg kg 50 kg 25kg Kg Kg 3 12 25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.00 16.00 7.50 0.50 30.00 5.00 12.00 12.00 16.50 28.00 3.00 4.00 4.50 1.00 48.00 90.00 12.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.00 159.00 9.00 12.00 0 5.60 4.00 3.00 9.00 9.00 7.50 50.00 26.00 4.80 9.00 15.60 7.50 0.50 30.00 5.00 12.00 12.00 16.50 28.00 3.00 4.00 4.50 1.00 141.00 90.00 0.00 168.00 20.00 36.00 108.00 148.50 210.00 150.00 104.00 21.60 9.00 1206.10

Money-out: Labour
Fire belt Pesticide spraying Fertilizer application Weeding Maintenance pruning Scouting/fruit drop Harvesting Labour need and Cost [B] GHC MD MD MD MD MD MD MD 10 48 0 13 4 12 4 5.00 5.00 5.00 5.00 5.00 5.00 5.00 50.00 240.00 0.00 65.00 20.00 60.00 20.00
455.00

10 144 80 10 20 10 24 298

5.00 5.00 5.00 5.00 6.00 5.00 5.00

50.00 720.00 400.00 50.00 120.00 50.00 120.00

1510.00 2716.10

MD

91

Total Money-out [A + B] GHC Yield Price Kg

GHC/kg

614.50 10000 0.30 10000 0.30 3,000.00 2385.50 47

32000 32000 0.45 0.45

Money-in [C]

GHC

15,7050.00 13,033.90

Gross Margin [C] MINUS [A + B] GHC

Module 6: Decisions for Doing Good Business

Finding opportunities to increase revenue and to reduce cost of production After all the calculations, we will determine the opportunities to increase revenues. By looking at the numbers on this page we will learn how to make investment decisions. We will determine the best opportunities by using gross margin, unit cost, labour productivity and capital productivity. Rank crops based on each of these factors (gross margin, unit cost, capital and labour productivity). For example which crop has the least unit cost of production? Current practices Improved practices

RANK

RANK

Chili Pepper
Gross margin (Profit or loss) GHC Money in MINUS Money out Unit cost (GHS/Kg) Variable/Yield Labour Productivity (GHS per MD) Gross revenue - Input Cost/Labour needs Capital Productivity Gross margin/Variable Costs

2,107.50 0.29 15.62 2.02

4,215.00 0.25 21.10 2.58

Maize
Gross margin (Profit or loss) GHC Money in MINUS Money out Unit cost (GHS/Kg) Variable/Yield Labour Productivity (GHS per MD) Gross revenue - Input Cost/Labour needs Capital Productivity Gross margin/Variable Costs

55.00 0.45 5.50 0.11

652.50 0.28 11.54 0.77

Mango
Gross margin (Profit or loss) GHC Money in MINUS Money out Unit cost (GHS/Kg) Variable/Yield Labour Productivity (GHS per MD) Gross revenue - Input Cost/Labour needs Capital Productivity Gross margin/Variable Costs

2,385.50 0.06 31.21 3.88

13,033.90 0.08 48.81 4.79

Module 6: Decisions for Doing Good Business

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Exercise 8: fill in the unit cost, labour and capital productivities using information from the previous page.
Improved varieties Unit cost (GHS/Kg) Variable/Yield Labour Productivity (GHS per MD) Gross revenue - Input Cost/Labour needs Capital Productivity Gross margin/Variable Costs Chili Maize Mango

Now Compare different enterprises to assess their cost and productivity 1. 2. 3. 4. 5. 6. Which enterprise is more productive in the use of labour? What are the factors that affect labour productivity? Which enterprise is more capital productive? Which factors affect capital productivity? What is the importance of capital productivity to an entrepreneur? Would an entrepreneur engaged in a business comprising these 3 enterprises consider his/her business as profitable?

Main Lessons:
1. The unit cost of a crop indicates if it can compete on the international market with the same crop produced elsewhere. In the case of food crops, the Unit Cost indicates if it is better to buy the crop on the market. 2. If the unit cost of product is greater than the selling price on the market, it is not profitable to produce such a product , it is better to buy it on the market and concentrate on producing a product which has a lower unit cost than the selling price. 3. Comparing profits of different crops and production techniques help to make decisions on using the land to maximize revenue. This comparison is important to all agricultural entrepreneurs because production decisions are based on them. 4. Improved production techniques, increases the labour productivity of an enterprise because it increases the total income received from the sale of that product (remember total income = price x yield). Therefore, improved technology increases yield and lower the amount of labour needed in the enterprise. 5. The good agricultural entrepreneur knows that an enterprise is only profitable when the income received (money-in )is greater than the total cost of production (money out). The greater the money-in, the more productive is the money invested (moneyout) and the more profitable is that enterprise.
Module 6: Decisions for Doing Good Business 49