Budgeting Tools

1
Budgeting Tools

1. Enterprise Budgeting
2. Partial Budgeting
3. Whole-farm Budgeting
4. Cash Flow Budgeting

2
Enterprise Budgeting

• What is an enterprise budget?
• Estimate of revenues, costs and returns for an
  enterprise
• What is an enterprise?
• An individual crop or livestock activity
• Farms often have several enterprises

3
Enterprise Budgeting

• What is the purpose enterprise budget?
• Identify the most profitable enterprises to be
  included in a whole-farm plan
• To calculate cost of production for an output
• Make decisions on production vs. purchase for
  intermediate products

4
Enterprise Budgeting

• Usually done on a per unit basis (i.e. per acre
  or per head)
• Is an economic budget
• Includes applicable opportunity costs
• Should use profit maximizing input/output levels
• Enterprise budget includes
• Revenue
• Variable Costs
• Fixed Costs

5
Enterprise Budgeting

• Variable costs
• A.k.a. Operating or Direct costs
• Exist only as a result of production from this
  enterprise
• Fixed costs
• A.k.a. Ownership or Indirect costs
• Would exist even if enterprise production was
  zero
• Are allocated across enterprises
• Must be related to enterprise production
• include relevant opportunity costs

6
Revenue

• Price x yield
• Product-specific payments
• USDA program payments
• Income from by-products

7
Variable costs

• Supplies
• Seed, fertilizer, herbicide (crop enterprise)
• Feeds, vet., breeding, bedding (livestock)
• Other variable costs
• Marketing expenses, utilities
• Machinery operating costs
• Fuel, repairs

8
Fixed costs

• Labor
• Hours x wage rate
• Use opportunity cost for unpaid labor
• Investment ownership costs
• Depreciation, interest, housing
• Land charge (two methods)
• Interest rate x value of land
• Rental rate

9
Enterprise Budgeting

• What does the E.B. calculate?
• Income over variable costs
• A.k.a. gross margin
• Contribution of enterprise toward payment of
  fixed costs
• Estimated economic profit
• Total revenue less total expenses
• Are land, labor, and capital earning their
  opportunity cost in this use?

10
Break-Even Analysis

• Break-even yield
• Yield necessary to cover all costs, for a given
  output price
• equals total cost/output price
• Break-even price
• Output price required to cover all costs, for a
  given yield
• equals total cost/expected yield