When is an expense profitable?

A farmer who wants to get on has to spend money for his farm He has to buy selected varieties of seed, pesticides, fertilizers; he has to invest by buying new tools, improving his land, making new plantations.

But a farmer has to be very careful when he spends money; he must not spend on just anything for the farm.

He must spend only on what will earn money later. When an expense earns a lot of money, we say that it pays, that it is profitable.

What makes an expanse profitable? Three conditions are necessary to make an expense profitable:

(1) The increase in output must repay the money spent.
(2) The increase in output must pay the interest (here reckoned at 5%).
(3) In addition, the increase in output must leave a profit,

The following two examples show how to reckon the returns on an expense.

In the first example, we show the returns on an expense for one year (the expense has to be repeated every year).

In the second example, we show the returns on an expense that is required once in several years (it is not repeated in following years).

In the first case:

If the expense is yearly, it will be profitable if:

(1) the increase in output repays the money spent;
(2) the increase in output also repays the interest on the money spent;
(3) in addition, the increase in output leaves a profit.

Example:

In 1970 John sowed 1 hectare of cotton, he did his work well, and he used pesticides, but did not apply any fertilizer. He harvested 720 kg of cotton, which sold at 30 francs per kilo. He earned: 720 x 30 francs = 21 600 francs.

In 1971 John again sowed 1 hectare of cotton, he did his work well, he used pesticides, and applied 100 kg of ammonium sulphate; on this he spent 2500 francs. He harvested 960 kg of cotton, which ho sold at 30 francs per kilo. He earned: 960 x 30 francs = 28 800 francs.

Thanks to the fertilizer, ho increased his earnings by 28 800 francs loss 21 600 francs = 7 200 francs. But he has to repay the cost of the fertilizer: 2 500 francs. Ho also has to pay the interest on the cost of the fertilizer (interest at 5%):

2 500 x 5/100 = 125 francs

This makes a total of: 2 500 francs plus 125 =2625. So his increased earnings are really: 7200 francs less 2 625 francs = 4 575 francs.

Therefore, the use of fertilizer is profitable because the farmer earns an additional 4 575 franca

In the second case:

If the expense happens once in several years, it will be profitable if:

(1) the increase in output in all these years repays the money spent.
(2) if the increase in output in all these years repays the interest on the money spent.
(3) if the increase in output in all these years leaves a profit.

Example:

In 1968 Karamoko bought a pair of oxen end a plough. I le paid 25 000 francs for the oxen and 10 000 francs for the plough.

He spent a total of 35 000 francs. With the two oxen and the plough Karamoko can increase the area cultivated; he will grow crops on another hectare and thus will get a bigger harvest. He will be able to do his work quicker and better, and thus will increase the yield.

The plough and the oxen will last him for 5 years. The yearly cost of the plough and oxen will be:

35 000/5 years francs = 7 000 francs a year.

The yearly interest on the sum spent must also be included (taking the interest at 5%):

35 000 x 5 / 100 = 1 750 francs

Each year the increase in output obtained with the plough and oxen should be more than:

7 000 francs plus 1 750 francs = 8 750 francs.

In 1969 Karamoko earned 13 650 francs more.
In 1970 Karamoko earned 18 220 francs more.
In 1971 Karamoko earned 26 400 francs more.

Karamoko has not yet worn out his plough and oxen, but with the money already earned in 3 years he can cover much more than the cost of what he bought. His investment is profitable.

How a farmer can find the money

To get on, a farmer must invest; so he must spend money. But often farmers have no money in reserve. They are obliged to look for the money elsewhere.

Where can a farmer find the money?
To find the money, the farmer has to ask for money. He has to borrow.

To borrow = To ask someone for money. This money has to be returned after a certain time.
To lend = To give money to someone who will return it after a certain time.

The farmer can borrow money from a relative or a friend. But often relatives and friends have no money to lend.

The farmer can borrow money from dealers. But often dealers demand a very high rate of interest. Farmers should not borrow from dealers because they will often be robbed.

The farmer can borrow from a commercial bank. But commercial banks do not readily make loans to individual farmers, and moreover they ask a high rate of interest.

To get money, farmers should apply to an agricultural credit institute.

In most African countries there are credit institutes that lend money to farmers. These institutes may have different names: they may be called National Agricultural Credit Fund, or else National Agricultural Development Bank. In other countries there are development corporations which lend money to farmers.

These credit institutes make loans at a fairly low rate of interest.

They can make short- term loans, that is, loans for yearly expenses such as buying fertilizers and pesticides. The farmer has to repay the money after the harvest.

They can also make medium- term and long- term loans for investment expenses such as buying tools, improving a plantation. The farmer has to repay the money over a period of 4 or 5 years, or of 10 years.

The agricultural credit institutes do not readily lend money to individual farmers, because sometimes individual farmers do not repay the money. The credit institutes often prefer to lend money to farmers who belong to a cooperative group.

Why?

Because if a farmer cannot repay the money he has borrowed, then the other farmers in the group will repay the money in his place. This is what is called mutual liability. All the farmers in the group undertake to help the one who is in difficulty.

Farmers in a cooperative group get a loan more easily.