AGEC 407

Budgeting Tools

• Enterprise Budgeting

• Partial Budgeting

• Whole-farm Budgeting

• Cash Flow Budgeting

AGEC 407

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

AGEC 407

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

AGEC 407

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

AGEC 407

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

AGEC 407

Revenue

• Price x yield

• Product-specific payments– USDA program payments

• Income from by-products

AGEC 407

Variable costs

• Supplies– Seed, fertilizer, herbicide (crop enterprise)– Feeds, vet., breeding, bedding (livestock)

• Other variable costs– Marketing expenses, utilities

• Machinery operating costs– Fuel, repairs

AGEC 407

Fixed costs

• Labor– Hours x wage rate– Use opportunity cost for unpaid labor

• Investment ownership costs– Depreciation, interest, housing– Land charge (two methods)

1. Interest rate x value of land

2. Rental rate

AGEC 407

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?

AGEC 407

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