Ag Business Management
Financial Planning
Spencer
Agricultural Education
Financial Planning: Budgeting
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Objective
Why?
Types
Principles
Limitations
How?
Budgeting
• Objective
– Dollar and cent organization of the future
and plan of action
• Good planning = increased returns
– “Success is where opportunity meets
preparation”
• Goal: organize the four factors of a
production system
Production System: Four Factors
Why Budget?
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Plan for the useful life of assets
Excellent device for organizing
Useful to obtain credit from lending agencies
Allows for experimentation with possible
outcomes before resources are committed
• Identify cost and income items that might
otherwise be overlooked
• Refine an organization
Budget Types
• Enterprise
– One production area for one production period
– Assists in determining breakeven levels
• Partial
– Change in the farm or ranch business
• Whole Farm
– Entire business for a specific period of time
Budgeting Principles
1. Invest more if returns increase
2. Minimize investments in costs (inputs)
3. Invest in a different product if the return is
greater
4. Invest money where it will earn the highest
returns
5. Discount for time and risk
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#’s 1,2, & 3 assume unlimited resources
and perfect knowledge
Budgeting Information
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Consider quantity, price, and timing of
inputs
Sources of information:
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Farm or ranch records (actual records)
Area or state summary analysis
Sample budgets
County averages and production data
Magazines and literature
Neighbors, meetings, classes
Computer networks (internet)
Budgeting Limitations
• Time
• Predicting prices and yields
– Historical data and contracting can
minimize risk
• Risks can question budget reliability
• Tendency to under estimate costs, over
estimate production, and over estimate
income
Budgeting Guidelines
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Decide what you want to analyze
Decide type of budget
Select time period
Decide what data is needed
Decide how many alternatives will be
evaluated or analyzed
Budgeting Steps
1. Appraisal: business, family goals, and
objectives
2. Identify inventory available for use (four
factors)
3. Select physical data for inputs and
outputs
4. Select market prices for inputs/outputs
5. Calculations: costs and returns
Enterprise Budgets
• Purpose: determine breakeven levels
• Limitations: difficult to predict market
prices and input purchases
• Advantage: analyses and comparisons
• Components
– Income: estimate yields and prices
(estimated price/unit, total value)
– Expenses: cost of producing the product
Enterprise Budgets
• Components
– Returns: income remaining after
subtracting selected expenses
• Return above operating costs = projected value
– operating costs
• Return above all costs = projected value –
(operating costs + fixed costs)
– Units: income, costs, and returns calculated
on a per unit basis
Enterprise Budgets
• Cost
– Variable (operating): seed, feed, fertilizer,
hourly labor, repairs, fuel, etc.
– Fixed: depreciation, interest, insurance, taxes
on real estate, machinery, breeding livestock
– Land
• Rent: paid annually is a variable cost, paid longer
term is a fixed cost, crop share = subtract
landlord’s share of production
• Owned: interest and taxes as fixed costs or listed as
opportunity cost (renting)
Enterprise Budget Analysis
• Return above variable (operating) costs =
projected value – total operating costs
– Positive indicates that at least part of the fixed
costs will be paid
• Return above all costs = projected value –
(operating costs + fixed costs)
– In the long run, must be positive
Enterprise Budget Analysis
• Breakeven Prices (BE Prices)
– Prices necessary to cover variable and fixed
cost
– Variable operating BE price =
variable costs/unit of yield
– Total BE price = total costs/unit of yield
Enterprise Budget Analysis
• Breakeven yields (BE Yield)
– Yields necessary to cover costs = variable or
total
– Finds minimum yield that would justify
production
– BE yield = operating costs/output price OR
total costs/output price
Modifying the Budget
• Used to adjust to changes (market,
weather, yields, costs, soil, production)
• Combine returns and costs in a different
way
Partial Budgeting
• Examples:
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Expanding an enterprise
Alternative enterprise
Changing production practices
Buying new equipment or machinery
Partial Budgeting
• Estimating costs and returns
– Positive effects
• Elimination or reduction of some costs
• Additional returns received
– Negative effects
• Additional costs incurred
• Elimination or reduction of some returns
– Net change in income =
• Total additional returns and costs – total additional
costs and reduced returns
Whole Farm
• Project profitability of the whole farming
operation—total $
• Compare profitability of alternative farm
plans
• Estimate requirements for labor, capital,
feed, etc.