Budgeting Tools Enterprise Budgeting Partial Budgeting Wholefarm Budgeting

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 AGEC 407