Farm Management: Enterprise Budgeting

Chapter Overview

• Purpose and Use of Enterprise Budgets: Estimate revenue, expenses, and profits for individual enterprises (crop or livestock).

• Construction of Budgets: Methods for creating crop and livestock enterprise budgets.

• Analysis of Budgets: Techniques for interpreting and analyzing the budgets to inform decision-making.

Chapter Objectives

• Define enterprise budget: A tool for estimating potential revenue, costs, and profit.

• Illustrate sections of an enterprise budget (e.g., revenue, variable costs, fixed costs).

• Construct a crop enterprise budget and recognize differences in livestock budgeting.

• Analyze budget data for cost of production and break-even metrics.

Enterprise Budgets

• Definition: A financial plan estimating revenue, expenses, and profits for a particular enterprise, such as a specific crop or livestock type.

• Unit of Measurement:

  • Crops: Typically per acre.

  • Livestock: May refer to head or specific production units.

Example: Watermelon Budget (1 acre)

• Revenue:

  • Revenue from 400 cwt at $16/cwt = $6,400

• Variable Costs: Totaling $5,535

  • Breakdowns include seeds, fertilizers, pesticides, labor, etc.

• Fixed Costs: Totaling $625

• Total Costs: $6,160

• Estimated Profit (Return to Management): $240

Economic Budgeting

• Inclusion of Opportunity Costs: Economic budgets consider opportunity costs for labor and capital.

• Management Return: In watermelon budgeting, no opportunity cost for management is included.

Constructing Enterprise Budgets

Crop Budgets

1. Revenue Sources: Cash and non-cash from production.

2. Operating Costs: Expenses incurred only if production occurs.

3. Ownership Costs: Fixed expenses like machinery, irrespective of crop yield.

4. Profit Calculation: Return attributed to management after all costs.

Example: Corn Budget (1 acre)

• Revenue Sources: Total revenue = $525.00

• Operating Expenses: Total operating expense = $510.00

• Profit (Return to Management): $15.00

Livestock Budgets

• Unit of Measure: Can vary (e.g., per cow, liter of swine).

• Time Frame: Generally one year, but can differ.

Example: Cow/Calf Budget for One Cow Unit

• Revenue: Totaling $881.44

• Operating Expenses: $679.44

• Profit Calculation: Income exceeding operating and ownership expenses.

General Comments on Budgets

• Data Sources: Past farm records or state data beneficial; however, third-party budgets may not accurately reflect involved conditions.

Prices and Yields in Budgets

• Future budgets need estimates of next year’s prices/yields.

• Long-term budgets require average pricing and yield estimates.

Analyzing Enterprise Budgets

• Economic Budget Considerations: Includes opportunity costs.

• Profit (Loss) Measurement: Reflects remaining balance after all costs.

  • Zero economic profit indicates all resources earn their opportunity costs.

Cost of Production

• Definition: Average cost to produce one unit, computed as total costs divided by expected yields.

• Profitability requires selling price > cost of production.

Break-Even Analysis

• Importance: Determines yield/price needed to cover costs.

Break-Even Yield for Corn

• Calculated by dividing total costs ($510 per acre) by selling price.

Break-Even Price for Corn

• Found by dividing total costs by expected yield, essentially equating to cost of production.

Summary of Chapter

• Enterprise Budgets: Consolidate income and expenses for a specific enterprise.

• Economic Focus: Generally includes opportunity costs alongside traditional costs.

• Applications: Effective for comparing profitability and optimizing a farm plan.