Budget AnalysisAg Management

Chapter 4

Planning a Budget Good planning = Increased Returns The job you do when your budget for your

farm or ranch business shows up in your record books.

4 Factors of Production

CAPITAL LABOR

LANDMANAGEMENT

7 Questions to Answer What are available factors of production? What crops can be grown? What proportion of the land should be used

for each crop considered? What labor is necessary? What capital is needed? What management and production practices

should be used?

What is Budgeting Budget

A plan for action by the business. Includes: Projections of income and expenses for

all or part of the business. The best format for a budget in our complex

economy is a FORMAL WRITTEN PLAN

Types of Budgets Enterprise Budgets Partial Budgets Whole Farm Budget

Budgeting Principles

1. Invest more if returns increase

2. Invest as little as

possible in cost

3. Invest in a different product if return is greater

4. Move investments where they make the

most returns

5. Discount for time and

risk

Where Do You Get Budget Information? All budgets should be prepared for analysis

based on the best source of information available.

Your budget is only as good as the source you use.

Some sources are: Actual farm or ranch records Area or state summary analysis Sample budget County averages and production data Information from meetings and classes Neighbors Computer networks

Enterprise Budgets

What is an Enterprise Budget? Projection of costs and returns for a

practicular production process Used to estimate profit and breakeven levels

for prices or yields Projects the outcome of a particular

organization of inputs and production practices.

Limitations of Enterprise Budgets Lack of reliable information Prices are often difficult to estimate because

they fluctuate due to the many factors of supply and demand

Advantages of Enterprise Budgets Organize available information for breakdown

analysis and comparison among competing enterprises

Components of an Enterprise Budget Income

Estimate of yields and prices. Shows the product produced, the units of production, the estimated price per unit and the total value of production

Expense The cost of producing the product. Shows variable and fixed costs of

production and lists all the inputs, the unit of input, the quantity of input and total cost of inputs.

Returns Income remaining after selected costs are subtracted. Returns above

operating costs and returns and returns above all costs except overhead, risk & management are calculated on the budget.

Can be used several ways to provide management information Returns Above Total Operating Cost= Projected Value-Variable Operating Costs Returns Above All Costs Except Overhead, Risk and Management= Projected Value-

Total Cost (Variable Operating Cost+Fixed Cost)

Additional information list any supplemental information Units

Income, costs and returns Crops are calculate on a per acre basis, livestock on a per head basis

Cost Categories in Enterprise Budgeting Variable or Operating Cost

Cost of items that will be used during one production period

They will not be purchased if the enterprise is not used

Always included Examples are: feed, seed, fertilizer, normal

repairs, hourly labor, tractor operating expenses Fixed Cost

Relatively easy to allocate to individual enterprises Always included Includes: depreciation, interest, insurance, taxes

on real estate, machinery and breeding livestock

Allocation of Costs Some costs are hard to allocate to 1

enterprise Buildings, utilities, travel and miscellaneous

cost such as record keeping and budgeting fall into this category

Develop a consistent way to divide these cost among the enterprises.

Whole Farm Budget Physical and financial plan of the entire farm

or ranch business Designed to help plan and organize every

aspect of the business Preparation of this budget means identifying

all the parts of the total farm or ranch business and realizing the interrelationships among parts.

Limits to Whole Farm or Ranch Budgeting Land and operating capital you have or can

acquire are limiting factors in the budgeting analysis

Other factors that can be limitations Accurate information on assets Managerial skills Markets

It is important to recognize and plan for these limitations in the whole farm budget.

Partial Budgeting Projected costs and returns associated with

some change in the business Estimate the economic effects of adjustments

in the farm or ranch business User assumes that many aspects of the

business are constant Only interested in the parts of the business

that will change due to adjustment Basis of the concept is to analyze the impact

of a proposed change in the already developed plan

Examples of Partial Budgeting Expanding an enterprise Alternative enterprises Changing production practices Buying new equipment or machinery

4 Effects of Partial Budgeting Partial budgeting is based on the principle

that a change in the organization of the business will have one or more of these effects

The change will eliminate or reduce some costs. (Pos)

The change will cause some additional returns to be received. (Pos)

The change will cause some additional costs to be incurred. (Neg)

The change will eliminate or reduce some returns. (Neg)

Net Change in Income Net change between positive and negative

economic effects is an estimate of the net effect of making the proposed change

Positive net change indicated a potential increase in income due to change

Negative net change in income indicates a potential reduction in income if the change is made.

Remember, net change is the difference between the original alternative and the proposed change. It is NEVER an indication of overall profit of either alternative

Components of a Partial Budget Negative Effects

1. Additional Costs2. Reduced Returns3.Total Additional Costs and Reduced Returns

Positive Effects4.Additional Returns5.Reduced Costs6. Total Additional Costs and Reduced Returns

(7) Net Change in Income (line 6-line 3)

Application of a Partial Budget Read p. 4-18 to 4-20