Chapter 10: Kay and Edwards Enterprise Budgeting Chapter 10: Kay and Edwards

Agenda Define and Discuss Enterprise Budgets Examine Components of a Crop Budget Discuss Issues with Enterprise Budgets Discuss the Differences of a Livestock Enterprise Budget Discuss Accounting Versus Economic Profits

Enterprise Budgets It is an organization of revenue, expenses, and profit for a single enterprise. The base unit for enterprise budgets is usually one acre for crops and one head for livestock. The primary purpose of enterprise budgets is to estimate costs, returns, and profits per acre or per head for the enterprises.

Structure and Content of Enterprise Budgets Enterprise name and the budgeting units are shown first. Income or revenue is shown next. Costs are usually shown after revenue and broken up into two areas– variable, operating, or direct costs, and fixed, ownership, or indirect costs.

Structure and Content of Enterprise Budgets Cont. Variable costs can be broken up into pre-harvest and harvest costs. Fixed costs include the fixed cost for the machinery needed to produce the crop, and a charge for land use. Before calculating fixed costs, income above variable cost is calculated.

Structure and Content of Enterprise Budgets Cont. At the bottom of an enterprise budget is the estimate profit per unit. This value is found by subtracting total cost from total revenue. Quantity, unit, and price should all be included on the enterprise budgets.

Structure and Content of Enterprise Budgets Cont. Usually opportunity costs are included on the enterprise budget. Hence, the enterprise budget represents an estimated economic profit. The opportunity cost of management does not usually end up on the enterprise budget.

Crop Enterprise Budget: Revenue The revenue section should include all cash and non-cash revenue from the crop. This implies that crops with the more than one revenue source should take that fact into account when dealing with revenue.

Crop Enterprise Budget: Revenue Cont. Projected profits can be very sensitive to how you estimate revenue. Yield and price estimates should be as accurate as possible. When choosing a projected price, a review of historical price levels, price trends, and outlook for the future should be conducted.

Crop Enterprise Budget: Revenue Cont. Projected yields should be based on historical yields, yield trends, and the type and amount of inputs to be used.

Crop Enterprise Budgets: Variable Expenses Seed, fertilizer, and chemicals Calculating these costs are straightforward. Labor For any labor that is not hired, an estimate of the opportunity cost of labor should be used.

Crop Enterprise Budgets: Variable Expenses Cont. Fuel, oil, and lubrication One way to estimate this cost is to divide total farm expense for fuel, oil, and lubrication by the number of crop acres. One better method is to determine fuel consumption per acre for each machine operation and then simply sum fuel usage for all the operations scheduled for this crop. Another better method is to compute fuel consumption per hour of tractor use and then determine how many hours will be needed to perform the machine operations.

Crop Enterprise Budgets: Variable Expenses Cont. Machinery repairs These cost calculations can be done in much of the same way as estimating the cost for fuel, oil, and lubrication. Interest This interest cost is on the capital tied up in operating expenses. Interest is charged on operating expenses without regard to how much is borrowed or even if any is borrowed.

Income Above Variable Costs This shows how much an acre of this particular enterprise will contribute towards payment of fixed or ownership expenses. It also tells you when you should shut down the enterprise, i.e., stop producing. This value can also be referred to as the gross margin

Crop Enterprise Budgets: Fixed Expenses Machinery depreciation First, compute the average annual depreciation on each machine used for the enterprise. Next, convert annual depreciation to a per-acre or per-hour value based on acres or hours used per year. Finally, depreciation can be prorated to a specific crop enterprise based on use.

Crop Enterprise Budgets: Fixed Expenses Cont. Machinery interest Allocate interest expenses the same way machinery depreciation was allocated. Machinery taxes and insurance Allocate taxes and insurance the same way machinery depreciation was allocated.

Crop Enterprise Budgets: Fixed Expenses Cont. Land charge Several ways to calculate: Charge what it would cost to cash rent similar land. Charge the opportunity cost of the capital invested. Even if the land is owned outright, a charge to land should be incorporated in the enterprise budget.

Crop Enterprise Budgets: Fixed Expenses Cont. Miscellaneous overhead These are expenses that cannot be directly associated with a single enterprise but are necessary and important farm expenses. Examples: share of pickup expenses, farm shop expenses, farm liability insurance, etc.

Crop Enterprise Budgets: Fixed Expenses Cont. The majority of fixed expenses of the enterprise can be summarized by DIRTI: Depreciation Interest Rent Taxes Insurance

Examples of Enterprise Budgets https://coststudyfiles.ucdavis.edu/uploads/cs_public/84/2e/842e78c3-3f2c-4595-ab4b-230b89b24150/broccoli_cc2012.pdf https://coststudyfiles.ucdavis.edu/uploads/cs_public/c5/a1/c5a181af-8e1b-474a-9509-443c3cb223ed/strawberry2ndyrcc2011.pdf https://www.extension.iastate.edu/AGDm/livestock/pdf/b1-21.pdf https://aede.osu.edu/research/osu-farm-management/enterprise-budgets

Profit or Returns to Management This value is calculated by subtracting total expenses from total revenue. If management has not been recognized in the budget explicitly, then this value is equal to profits and returns to management.

Problems Encountered with Crop Enterprise Budgets Multiple cropping This is when more than one crop is grown on the same land. Establishment cost for perennial crops, orchard, and vineyards. In this case, an establishment phase and production phase budget should be used.

Problems Encountered with Crop Enterprise Budgets Storage, transportation, and marketing expenses may be important for some crops.

Special Consideration in Livestock Enterprise Budgeting Unit Time Period Multiple Products Breeding Herd Replacement Feed and Pasture Livestock Facilities Machinery and Equipment

Economic Versus Accounting Profit Economic Profit This is the profit (or loss) leftover after accounting for all expenses including opportunity cost on management, unpaid labor, and capital. Accounting Profit This is the revenue leftover to cover your opportunity cost on management, unpaid labor, and capital.

Economic Versus Accounting Profit Cont. An enterprise budget deals with an economic profit. Having a profit of zero is not necessarily a bleak situation. It may just indicate you are covering your opportunity costs—no more and no less.

Final Notes The enterprise budget’s structure allows the farm manager the ability to use the economic rules of production for making decisions. One of the more important analytical tools to use on an enterprise budget is break-even analysis.

Final Notes Enterprise budgets should be made pre-planting and then updated post-harvest. Past post-harvest enterprise budgets should be examined on a yearly basis to see how revenue and costs are changing over time