FARM MANAGEMENT PBACTtCE OF CHESTER COUNTY, PA. 25 



The sources of income 1 on the 378 farms found in this survey, 

 together with the proportion of receipts from each source, are given 



1 Definitions. — A number of forma which are used in the discussion which follow are 

 more or less technical in character. These are defined below. 



The gross income of the farm is the sum of the receipts from all sources. The net 

 income is the difference between the gross income and the farm expenses. In cases where 

 no confusion is likely to arise from so doing, the net income will frequently be referred to 

 simply as the form income ; but where reference is made to income without qualification 

 as to gross or net the gross income is usually meant. The context will always make clear 

 the exact meaning intended. 



In most kinds of business the net income is referred to as the profits of the business, 

 and this is usually expressed in percentage of the capital invested. The term " profits " is 

 used in this sense especially in those cases in which every one connected with the business 

 receives a salary. In such cases the net income is profit on the capital invested. But, in 

 farming, the head of the business usually receives no salary ; in this case the net income 

 represents both interest on capital and the wages of the operator. 



In dividing the net income between interest on capital and wages of the operator there 

 are clearly two ways of procedure. We may subtract the value of the farmer's labor 

 from the net income, and call the remainder the profit on capital. But there 

 are very distinct advantages in dealing with the profits in farming in a different 

 way. It will be fouud more advantageous to assume a rate of interest for capital in- 

 vested, usually the current rate on well-secured farm loans, subtract the amount of this 

 interest from the net income, and call what is left the labor income of the farmer. By 

 using this labor income as the measure of efficiency in farming it will be seen that many 

 useful comparisons can be made that would not be possible in any other way. In this 

 bulletin it is assumed that capital is entitled to 5 per cent interest, and this figure is used 

 except where otherwise stated. 



Adjusted labor income. — It will later be shown that the amount of the labor income 

 depends largely on the magnitude of the farm business, and this in turn depends on the 

 size of the farm, especially in the case of farms similarly organized and devoted to the 

 same type of farming. Since on the great majority of farms in the Chester County 

 (Pennsylvania) survey area the type of farming is quite similar, the size of the farm is 

 the principal factor in determining the amount of the labor income. But in many cases it 

 is desirable to study the effect of factors other than size of farm. That is, it will fre- 

 quently be desirable to divide the whole number of farms into classes without reference to 

 size, and to determine the relation between labor income and the basis on which the farms 

 are grouped. This can be done very satisfactorily in many cases by using what in this 

 bulletin is termed the adjusted labor income. This is a modification of labor income in 

 such a way as to eliminate the influence of size of farm. The method is as follows : The 

 farms are first divided into groups based on size (area) ; the average of the labor incomes 

 in each size group is then calculated ; the labor income of each farm in a group is then 

 expressed in percentage of the average labor income of the size group to which that farm 

 belongs. Thus, the average labor income in the 61 to 80 acre group of farms operated by 

 their owners (see Table XXIII) is $730. On one of these farms the labor income was 

 $584, or 80 per cent of the average for the group. The adjusted labor income of this 

 farm is thus 80 per cent, or simply 80. In some of the tables the adjusted labor income 

 is calculated in dollars, but in most cases it is expressed merely in percentage of the group 

 averages. A very small farm having a labor income 80 per cent as great as the average of 

 farms of similar size and type is regarded as being as efficient as a large farm having a 

 much greater labor income, but which is 80 per cent of the average of the size group to 

 which the larger farm belongs. It will be found that the use of this adjusted labor 

 income permits many important comparisons that could not otherwise be made. 



Some writers on farm management limit the term profit to what is left of the net 

 income after deducting interest on capital and wages for the farmer. This is clearly a use 

 of the term inconsistent with the usual practice in the business world, but at the same 

 time it serves to make a useful distinction. In this bulletin, however, the word " profit " 

 is used in its more usual sense, and frequently, where the meaning intended is clear, the 

 labor income will be referred to as the profit of the farm. This is done to avoid frequent 

 repetition of longer phrases, but it is believed no confusion will result, since the context 

 will always show exactly the meaning in which the term is used. 



In this bulletin the 27 farms devoted either entirely or partly to the production of hot- 

 house products are referred to as special farms; the 378 farms operated by their owners 

 are usually referred to as owner farms ; and the 124 farms operated by tenants are called 

 tenant farms. Except where otherwise specifically stated, the discussions in this bulletin 

 relate to the 378 farms operated by their owners. 



