Planning & Decision Making

Planning & Decision Making Chapter 8

Terms to Know • Budget • Cash Flow • Cash Flow Budget • Cost Behavior • Credit • Enterprise Budget • Expense • Fixed Costs • Goals • Income Statement Budgets • Inventory • Net Income • Partial Budget • Relevant Range • Resources • Revenue • Systemic Decision Making Process • Variable Costs • Whole Business Budget

The Decision-Making Process 1. Planning (preparing a budget) 2. Deciding (select a course of action to follow) 3. Evaluating (comparing your budget to actual results)

Purpose of a Budget • The purposes of a budget are to: • 1. formulize your plans. • 2. communicate your plans. • 3. evaluate your performance. • 4. coordinate your activities.

Variable and Fixed Costs • Variable costs: the costs that change as production changes • Examples: fuel, soil, feed, fertilizer, medicines • Fixed costs: the costs that remain constant as production changes • Examples: wheelbarrow, gates, shovel, feed pan

Budgets Two types of budgets: income statement budget and cash flow budget Primary format used is the enterprise budget (a format of an income statement budget)

Systematic Planning • 1. Planning • Define the problem • Gather information about alternative solutions • Evaluate alternative solutions • 2. Deciding • Choose alternatives consistent with goals and objectives • Implement solution • 3. Evaluating • Analyze the consequences • Accept the consequences

Goal A definite statement that identifies activities, enterprises, and other achievable levels that you aspire toward.

Guidelines for making financial goals 1. Determine goals based on wants and needs 2. Set a timeline 3. Prioritize goals 4. Realistic & attainable 5. Compatibility (w/ business & family, needs) 6. Make the goal definite & measurable

I Cash flow budget • A. Estimate income and expenses during a future time period • B. Estimate when cash will need to be borrowed and when it can be repaid • 1. Develop a borrowing and debt repayment plan • 2. Rearrange purchases and scheduled debt repayments to minimize borrowing • 3. Combines both business and personal financial affairs into one complete plan • 4. Help spot an imbalance between current and non-current credit

II Parts of a cash flow budget • A. Expected cash income • B. Expected cash expenses • C. Includes all business and personal income and expenses • D. Lists total cash available

I. Enterprise Budgeting • A. Purpose of an enterprise budget • 1. Determine financial needs of the enterprise • 2. Determine how much will be spent in each part of the enterprise • 3. Documentation to leaders of how money will be spent • 4. Guide to live by for spending • 5. The bottom-line figure (estimated profit or return to management) can be compared to other enterprises to see which would be most profitable

I. Enterprise Budgeting • B. Four sections of the enterprise budget • 1. Income • 2. Variable costs • 3. Fixed costs • 4. Profit or return

I. Enterprise Budgeting • C. Development of an enterprise budget • 1. Estimate total revenue • a. Estimate expected yield • 2. Estimate total variable costs • a. Feed, seed, fertilizer • b. Fuel, repairs, labor • c. Include non-cash items • (1) opportunity cost • (2) owner/operator time • (3) farm-raised feed • 3. Determine fixed cost • a. Depreciation, taxes, interest, insurance • 4. Estimated net returns = total revenues – variable costs – total fixed costs

I. Enterprise Budgeting • D. Using the enterprise budget • 1. Covers at least one production cycle • 2. Estimates overall profitability • a. Compare enterprise budget to determine highest returns • b. Use to minimize losses • (1) due to fixed costs, negative returns may not mean don’t produce • (2) opportunity costs also can produce a negative return • (3) short term losses may be acceptable in certain production cycles • 3. Break-even • a. Break even points can be determined by substituting possible changes in the budget • (1) break-even yield = total costs ÷ price • (2) break-even price = total costs ÷ expected yield

Planning & Decision Making