Chapter 10: Enterprise Budgeting

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Chapter 10Enterprise Budgeting
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Chapter Objectives

• To define an enterprise budget and discuss its
  purpose and use
• To illustrate the different sections of an
  enterprise budget
• To learn how to construct a crop enterprise
  budget
• To outline additional problems and steps to
  consider when constructing a livestock budget
• To show how data from an enterprise budget can be
  analyzed and used for computing cost of
  production and break-even prices and yields

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Budgeting

• Often described as testing it out on paper
• Way to estimate profitability, proposed change,
  or an enterprise before making the final decision
  and implementing it

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Enterprise Budgets

• Enterprise Budget organization of revenue,
  expenses, and profit for a single enterprise
• Each crop or type of livestock is an enterprise
• Ex watermelons, cotton, wheat, beef cows, hogs

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Enterprise Budgets

• Purpose
• Estimate costs, returns, and profit per acre or
  per head for the enterprises
• Base Units
• One acre for crops
• One head for livestock
• Common units allow for comparison across
  enterprises

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Enterprise Budget

• Requires a lot of data
• Basic organization
• Name of the enterprise budgeted and building unit
• Income or revenue from enterprise
• Quantity, unit, and prices
• Cost section variable and fixed
• Estimated profit per unit

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CORN PRODUCTION (1 ACRE) ITEM VALUE PER
ACRE Revenue 130 bushels _at_ 2.50
bu. 325.00 Variable Costs Seed 25.00 Fert
ilizer 40.00 Chemicals 25.00 Machinery
Expenses 16.75 Drying 13.50 Hauling
7.50 Labor 21.00 Interest _at_ 10 for 6
mths. 5.95 Total Variable
Cost 154.70 Income above Variable
Cost 170.30 Fixed Costs Machinery
depreciation, interest, taxes, and
insurance 34.00 Land Charge 120.00 Total
Fixed Costs 154.00 Total Costs 308.70 Es
timated Profit 16.30
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Crop Enterprise Budgets

• Revenue
• Includes all cash and noncash revenue from the
  crop
• Sometimes two revenue sources
• Cotton lint and cottonseed
• Wheat grain and winter grazing of the growing
  wheat

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Crop Enterprise Budget

• Variable Expenses
• Contains only those that are incurred if the crop
  is produced
• Seed, fertilizer, and chemicals
• Contact input suppliers for prices
• Fuel, Oil, and Lubrication
• Compute fuel consumption per hour of tractor use
  and determine how many hours you will need
  machinery

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Crop Enterprise Budget

• Machinery Repairs
• Labor
• Include time to get between fields, adjust and
  repair machinery,
• Interest
• Charge as a of operating costs
• Income above Variable Costs
• Also called Gross Margin
• How much

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Crop Enterprise Budget

• Fixed Expenses
• Would exist even if the specific crop was not
  grown
• Machinery Depreciation
• Per-acre value
• Prorate to specific crop
• Machinery Interest
• Prorate to each specific enterprise

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Crop Enterprise Budget

• Machinery Taxes and Insurance
• Insurance on machinery
• Personal property taxes
• Land Charge
• Rent
• OC of capital invested
• Misc. Overhead
• Share of pickup expenses, farm liability
  insurance, farm shop expenses
• Profit or Return to Management
• If a charge for mgmt. has not been included, the
  value should be considered the return to mgmt.
  and profit

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Other Considerations

• Double Cropping
• Storage, Transportation, and Marketing may be
  important for some crops
• Establishment cost for perennial crops, orchards
  and vineyards

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Livestock Enterprise Budget

• Unit
• Usually one head
• Time Period
• If less than one year, make sure all costs and
  revenues are for the same time period
• Multiple Products
• More than one products producing revenue
• Ex dairy revenue from cull cows, calves, and
  milk
• Ex sheep cull breeding stock, lambs, and wool
• Ex Cow/calf cull cows, heifer calves, and steer
  calves

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Livestock Enterprise Budget

• Breeding Herd Replacement
• If replacements raised.
• 90 calving rate (45 steer calves, 45 heifer
  calves)
• Need 10 of heifer calves for replacement
• Keep 12 because you lose 2 to death
• Therefore, 33 heifers are sold
• If replacements purchased
• Revenue from selling offspring
• Purchase price / Useful Life for expense of
  purchasing

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Livestock Enterprise Budget

• Feed and Pasture
• Purchased feed valued at cost
• Farm raised feed valued at OC if sold off-farm
• Livestock Facilities
• Buildings, fences, pens, working chutes, feeders,
  waterers, well, windmills, feed storage, milking
  equipment
• Compute depreciation, taxes, insurance, and
  interest for each facility
• Report per head
• Machinery and Equipment
• If used for both crop and livestock production,
  divided proportionally between enterprises

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Analyzing Enterprise Budgets

• COST OF PRODUCTION TC / Y
• Ex TC is 158.90 for 48 bushels of wheat
• 158.90 / 58 3.31 per bushel
• BREAK-EVEN YIELD TC / Py
• Ex TC is 158.90 and wheat sells for 3.00
  bushel
• 158.90 / 3.00 53 bushels per acre
• BREAK-EVEN PRICE TC / YIELD
• Ex TC is 158.90 and yield is 48 bushels
• 158.90 / 48 3.31
• Sensitivity Analysis