Farm Management Chapter 10 Enterprise Budgeting
Enterprise Budgets • An enterprise budget provides an estimate of potential revenue, expenses, and profit for a single enterprise • Each type of crop or livestock is an enterprise • The base unit for crops is usually one acre • The base unit for livestock may be one head or some other convenient size
Constructing a Crop Enterprise Budget • Revenue: all cash and noncash revenue from the crop • Operating or variable expenses: all costs that would be incurred only if the crop is produced • Ownership or fixed expenses: costs that must be paid even if no crop is produced • Profit: represents a return to all resources that were not charged in the budget (usually management)
Constructing a Livestock Enterprise Budget • The unit may be one head, one cow unit for cattle, one litter for swine, or 100 birds for poultry • Several enterprise budgets can be constructed for different sizes of the same enterprise, such as 30 head, 50 head, and so on to reflect economies of size • The time period is usually one year but may be longer in some cases
General Comments on Enterprise Budgets • Economic principles of MVP=MIC and least-cost combinations should be considered when selecting input levels • Third-party budgets should be used with caution as they may not reflect conditions on a particular farm • Past farm records or state data can provide information for enterprise budgets
Prices and Yields The appropriate price and yield data used in an enterprise budget will depend on its use. A budget to be used for next year’s planning will require the best estimate of next year’s price and yield. Budgets used for long-run planning require estimates of average prices and yields over the long run.
Interpreting and Analyzing Enterprise Budgets An economic enterprise budget includes information on opportunity costs of labor, capital, land and perhaps management. The profit (or loss) is what remains after covering all expenses, including opportunity costs. A projected economic profit of zero means labor, land, and capital are earning exactly their opportunity costs.
Cost of Production total cost Cost of production = yield
Break-Even Analysis The data in an enterprise budget can be used to do a break-even analysis. Break-even yield and break-even prices can be computed.
Break-Even Yield total cost output price Break-even yield =
Break-Even Price total cost expected yield Break-even price =
Summary Enterprise budgets organize projected income and expenses for a single enterprise. Most enterprise budgets are economic budgets and will include opportunity costs in addition to cash costs and depreciation. Enterprise budgets can be used to compare the profitability of different enterprises and are useful for developing a whole-farm plan.