Partitioning Financial Returns: An Application to the Growth of Farm Firms

Excerpts from the report: Research on the financial management of farm firms has increased rapidly in the last few years, and a continuation of this trend is expected. One of the most innovative ideas in the recent literature of farm financial management is Warren Bailey's proposal for the functional partitioning of financial returns. It is a neat and logical method of allocating the earnings of a firm among the functions by whose activities the earnings were generated. In this report, Bailey's method is discussed, and its application to a problem situation in financial management is illustrated. Specifically, Bailey's method of partitioning returns separates the traditional management process into functional components that are useful as analytical tools in financial-management research. He calls these components investment, ownership, and entrepreneurship. A purpose of this report is to establish a conceptual framework within which Bailey's functional components have analytic rigor. To do this effectively, it is first necessary to describe and define the firm-decision milieu in which the functional distinctions are meaningful. Then, the precise meaning and measurement of the investment, ownership, and entrepreneurship functions are discussed. Finally, the concepts developed are used to analyze the achievement of growth goals for a dryland grain farm, given alternative assumptions about strategies and means for achieving growth.