HOW TO USE ENTERPRISE BUDGETS

By Sherrill Nott, Roger Betz,

and Gerald Schwab

Day 3: 10:30 -- 11:30 a.m.

Profit

Machines Barns

Cows Hogs Beef

Hay Silage GrainCash

Crops

Building Blocks for a Farm Business

Enterprise (or Profit Center):

Defined:

• Any segment of the business that can readily be separated by accounting procedures; i.e. separated according to its income and selected variable expenses

Enterprise BudgetProfit Center

• Defined: The projected income, expenses, and resource needs of a productive activity of the farming business on a per unit basis.

• For one unit Usually an income unit

Enterprise BudgetProfit Center

• In farming the unit is usually One acre of landOne animal -- dairy

cow, feedersOne litter -- swine

Enterprise Budget - Accounting BasisProfit Center

Format:

• Heading for identification+ Income = yield x price- Variable costs = Amount x cost= Gross margin (returns over variable costs)- Then fixed costs (if allocated)= Bottom line accounting profit measure

Enterprise Budget - Economic Basis

+ Accounting Profit (Loss)

- Opportunity Cost of Resources

= Economic Profit (Loss)

Opportunity Cost

Defined:

• The cost of using a resource in one way is the return that could be earned from using that resource in its next best, most profitable alternative use.

Enterprise Budget - Economic Basis

Uses:

• To determine enterprises to include in Farm Plan that best satisfy farm goals.

Enterprise Budget - Accounting BasisProfit Center Uses:

• Plan resource needs; e.g. seed, chemical, fertilizer

• Building blocks for doing forward planning

• Unit blocks for partial budgeting• Determine own cost of production• Determine potential accounting profit

(loss)

FINLRBFinancial Long Range Budgeting

• Current balance sheet Market value realistic? Debt repayments correct?

• Data bank of enterprise budgets Crops Livestock Feed prices

Sales price less than purchase cost

• Then, and only then, you can start: Long Range Planning (FINLRB)

FINLRB Enterprise Budgets

• Are on a gross margin basis

• Variable cost items can be stipulated by user

Gross Margin Plan for A B C Farm

G ross M arg in

V ariab le C os ts

O u tp u t

PROFIT

F ixed C os ts

To ta l F arm G ross M arg in

G ross M arg in

V ariab le C os ts

O u tp u t

G ross M arg in

V ariab le C os ts

O u tp u t

Less Less Less

A B C

Less

= ==

=

A Computerized Farm Planning and Analysis System

Create budgets here!

Scroll downIt’s a Feed crop!

These feeds are in addition to purchased feed above!

Prices used to:

Sell “extra” feed not eaten by livestock

Purchase “required” feed not grown for livestock

Your FINLRBBase Plan:

• First pass through FINLRB is to get a base plan

• Base plan is based on what actually happened last year

• Base plan to verify accuracy of your enterprise budgets

Strategy to Help Assure Accuracy

FINLRB projection - Recreate past history in Base Plan

• Production assumptions, yield, sale prices• Expenses per unit of production (feed, supplies,

seed)• Does base plan match the FINAN?• Can you justify differences? - Prices, yields• People tend to under estimate cost and over estimate

yields and price. (Sold corn for $2.46, but did I include marketing cost in the expenses?)

• May take 90% of your time getting the base plan modeled properly

Financial long range budgeting

Your farm plan in FINLRB

• Acres of various crops, by enterprise• Number of livestock, by enterprise• $’s of “Related Operating Expenses” that

were not allocated directly to an enterprise– Fuel & Oil

• “Other Information”– Family living draw, etc.

Set the crop plan

Scroll button

This many available?

Livestock plan … do you have the barn space?

Animal Enterprises

This is the last input screen

Future Plans

Alternative 1 in FINLRB

• You’re convinced . . . your base plan is complete and accurate

• Next year you might want to see the impact of: Price changes Alternative crops Changes in animal numbers

New Capital Investment Plans

• Land• Facilities• Site preparation• Breeding livestock• Machinery and equipment• Start up cost - getting the system filled up• Debt financing terms

After Base Plan is modeled properly, then make your changes for each

alternative

• Look at one change at a time

• Try to keep consistent across alternatives Compare “apples” to “apples”

Next Year’s Plan

• Once your base plan is fine tuned, it’s time to move on to the next alternative, which might be your plan for next year.

• Go back to FINLRB input and change the “Number of Plans,” OR

• Copy forward the base plan as most “OPERATING” and “OTHER” total dollars will stay the same

Do above; get an “empty” alternative column

This choice gets another column = exact copy …. You then change the numbers.

Next to last choice in drop down edit menu

Now fine tune Alt 1

Your FINLRB

• For the remainder of the time: Build and error check your data bank Fine tune your base plan (last year) Set up Alternative 1 (next year’s plan)