Enterprise Budgeting

Scott ClawsonNE District Ag Economist

OCES

Why Budget?

1. Simulations – look at different production combinations and see their financial impact

2. Uncover “hidden” cost items

3. Refine your process or operation

4. Seek credit

5. Learn to organize your business

What is Enterprise Budgeting?

• Types of budgeting

– Whole Farm

– Partial Budget

– Enterprise Budget

– Statement of what is generally expected from a set of production practices when producing a specified amount of a product

– Includes Variable and Fixed Expenses

– Profitability and Break Evens

– Cash vs Non-Cash Items

Description

Revenues

Variable Costs

Fixed Costs

• What all is included here?

– Detail of the enterprise, how much land is devoted?

– What is the production method?

– What should be there?

• Why is it important?

– Are you varying your production methods?

– A pencil budget on a napkin doesn’t stay around long…

Title Screenshot

Revenue Screenshot

• What are typical units of measurement for your product? (bushels for crops, per head for cattle)

• Sales price

• Quantity

• Can you expect full production?

– Historical averages

– % Weaned CC

– % of damaged produce

Revenues Price x Quantity produced that can be sold

 

Total Cost

Operating Costs

What is in an Enterprise Budget?

• Expenses•  

FEED?FERTILIZER?SEED?

FUEL?

LAND?

What is in an Enterprise Budget?

• Expenses

– Operating or Variable Expenses

– Called variable because their dollar amount varies with how much you decide to use or what your level of production is

– Items that are typically used up in one crop or season

– If you stopped producing a crop, would you still have to pay?

– What if I produced the input myself???

• Moving fertilizer from a pasture to a garden?

What is in an Enterprise Budget?

CashRE Taxes

Insurance

Non CashDepreciation

Interest on bldgs and equipment

What is in an Enterprise Budget?

• Expenses, cont.

– Fixed Costs

– Do not change with the level of production

What is in an Enterprise Budget?

• So what is depreciation?

– Economic depreciation is a systematic and rational method of allocating the non-recoverable cost of breeding stock, machinery, and buildings over the estimated number of years that the item will generate revenue.

– What does that mean? Car example…

• Why is there interest on buildings, etc.?

– We have money invested in those assets, may be a non cash expense?

What is in an Enterprise Budget?

Returns to Operating

Costs

Returns to All Specified

Costs

• Returns to Operating Costs – What does it tell us?

Enterprise Budgets: What Can They Tell Us?

 

 

 

Positive

• Continue production

• Covers variable costs and part of the fixed costs

NegativePositive Negative

• Not rational to continue

• Financial situation would improve from stopping production

Returns to Total Operating Expenses

Enterprise Budgets: What Can They Tell Us?

Positive

• Enterprise is profitable• Profits are contributing to farm

enterprise

Returns to All Specified Expenses

Enterprise Budgets: What Can They Tell Us?

Enterprise Budgets: What Can They Tell Us?

“IF YOU CAN’T PENCIL A PROFIT, YOU AREN’T LIKELY TO PLOW ONE.”

• Break Even Analysis

– How do we know what our lowest sales price should be?

– How do we how much production we need to cover our costs?

– This is a great management tool to make informed decisions!

• Calculation (don’t let it scare you)•  

Enterprise Budgets: What Can They Tell Us?

Breakeven Price

We have to sell our product for that amount to cover our operating

expenses – or breakeven.

• Lets look at a wheat example:

– Operating Cost = $140.10/acre

– Other Income = $0

– Yield = 31.97 bu/ac

Enterprise Budgets: What Can They Tell Us?

 

 We need to sell

wheat for $4.38 /bu to cover our

operating costs.

• Lets look at a wheat example: What about production break even?

– Operating Cost = $140.10/acre

– Other Income = $0

– Yield = 31.97 bu/ac

– Expected Sales Price = $7.50/bu

Enterprise Budgets: What Can They Tell Us?

 

 We need to produce wheat 18.7 bu/ac to cover our operating

costs.

Enterprise Budgets: What do we do now?

• Develop a system to maintain records

– Damona’s 30+1 Plan

– Spend 30 minutes each week maintaining records

– Take one step each month to improve your record-keeping system

• Paper or Computer?

• Identify risk areas

• Identify hidden costs

• Stress Test

• Make sound decisions!!!!!!

Enterprise Budgeting

QUESTIONS?

Scott ClawsonNE District Ag Economist

OCES