Budget Analysis

1. Budget Analysis Ag Management Chapter 4

2. Planning a Budget • Good planning = Increased Returns • The job you do when your budget for your farm or ranch business shows up in your record books.

3. 4 Factors of Production CAPITAL LABOR MANAGEMENT LAND

4. 7 Questions to Answer • What are available factors of production? • What crops can be grown? • What proportion of the land should be used for each crop considered? • What labor is necessary? • What capital is needed? • What management and production practices should be used?

5. What is Budgeting • Budget • A plan for action by the business. • Includes: Projections of income and expenses for all or part of the business. • The best format for a budget in our complex economy is a FORMAL WRITTEN PLAN

6. Types of Budgets • Enterprise Budgets • Partial Budgets • Whole Farm Budget

7. Budgeting Principles

8. Where Do You Get Budget Information? • All budgets should be prepared for analysis based on the best source of information available. • Your budget is only as good as the source you use. • Some sources are: • Actual farm or ranch records • Area or state summary analysis • Sample budget • County averages and production data • Information from meetings and classes • Neighbors • Computer networks

9. Enterprise Budgets

10. What is an Enterprise Budget? • Projection of costs and returns for a practicular production process • Used to estimate profit and breakeven levels for prices or yields • Projects the outcome of a particular organization of inputs and production practices.

11. Limitations of Enterprise Budgets • Lack of reliable information • Prices are often difficult to estimate because they fluctuate due to the many factors of supply and demand

12. Advantages of Enterprise Budgets • Organize available information for breakdown analysis and comparison among competing enterprises

13. Components of an Enterprise Budget • Income • Estimate of yields and prices. Shows the product produced, the units of production, the estimated price per unit and the total value of production • Expense • The cost of producing the product. Shows variable and fixed costs of production and lists all the inputs, the unit of input, the quantity of input and total cost of inputs. • Returns • Income remaining after selected costs are subtracted. Returns above operating costs and returns and returns above all costs except overhead, risk & management are calculated on the budget. • Can be used several ways to provide management information • Returns Above Total Operating Cost= Projected Value-Variable Operating Costs • Returns Above All Costs Except Overhead, Risk and Management= Projected Value- Total Cost (Variable Operating Cost+Fixed Cost) • Additional information list any supplemental information • Units • Income, costs and returns • Crops are calculate on a per acre basis, livestock on a per head basis

14. Cost Categories in Enterprise Budgeting • Variable or Operating Cost • Cost of items that will be used during one production period • They will not be purchased if the enterprise is not used • Always included • Examples are: feed, seed, fertilizer, normal repairs, hourly labor, tractor operating expenses • Fixed Cost • Relatively easy to allocate to individual enterprises • Always included • Includes: depreciation, interest, insurance, taxes on real estate, machinery and breeding livestock

15. Allocation of Costs • Some costs are hard to allocate to 1 enterprise • Buildings, utilities, travel and miscellaneous cost such as record keeping and budgeting fall into this category • Develop a consistent way to divide these cost among the enterprises.

16. Whole Farm Budget • Physical and financial plan of the entire farm or ranch business • Designed to help plan and organize every aspect of the business • Preparation of this budget means identifying all the parts of the total farm or ranch business and realizing the interrelationships among parts.

17. Limits to Whole Farm or Ranch Budgeting • Land and operating capital you have or can acquire are limiting factors in the budgeting analysis • Other factors that can be limitations • Accurate information on assets • Managerial skills • Markets • It is important to recognize and plan for these limitations in the whole farm budget.

18. Partial Budgeting • Projected costs and returns associated with some change in the business • Estimate the economic effects of adjustments in the farm or ranch business • User assumes that many aspects of the business are constant • Only interested in the parts of the business that will change due to adjustment • Basis of the concept is to analyze the impact of a proposed change in the already developed plan

19. Examples of Partial Budgeting • Expanding an enterprise • Alternative enterprises • Changing production practices • Buying new equipment or machinery

20. 4 Effects of Partial Budgeting • Partial budgeting is based on the principle that a change in the organization of the business will have one or more of these effects • The change will eliminate or reduce some costs. (Pos) • The change will cause some additional returns to be received. (Pos) • The change will cause some additional costs to be incurred. (Neg) • The change will eliminate or reduce some returns. (Neg)

21. Net Change in Income • Net change between positive and negative economic effects is an estimate of the net effect of making the proposed change • Positive net change indicated a potential increase in income due to change • Negative net change in income indicates a potential reduction in income if the change is made. • Remember, net change is the difference between the original alternative and the proposed change. It is NEVER an indication of overall profit of either alternative

22. Components of a Partial Budget • Negative Effects 1. Additional Costs 2. Reduced Returns 3.Total Additional Costs and Reduced Returns • Positive Effects 4.Additional Returns 5.Reduced Costs 6. Total Additional Costs and Reduced Returns • (7) Net Change in Income (line 6-line 3)

23. Application of a Partial Budget • Read p. 4-18 to 4-20