Farm budgeting app by Farmsoft controls entire fresh produce fruit and vegetable farm budgets: Prepare farm budget projections, monitor actual farm costs and farm budget performance.
Farm Budgeting: Definition, Types and Advantages | Agriculture
Read this article to learn about Farm Budgeting. After reading this article you will learn about: 1. Definition of Farm Budgeting 2. Types of Farm Budgeting 3. Advantages.
Definition of Farm Budgeting:
Farm plan is a programme of the total farm activity of a farmer drawn up in advance. Farm plan serves as the basis of farm budgeting. Therefore farm plan can be prepared without a budget but budgeting is not possible without farm plan.
Therefore the budgeting can be defined as under:
(a) The expression of farm plan in monetary terms by estimation of receipts, expenses and net income is called budgeting.
(b) Farm budgeting is a process of estimating costs, returns and net profit of a farm or a particular enterprise.
(c) Budget is a statement of estimated income and expenditure.
Types of Farm Budgeting:
(a) Partial Budgeting:
It refers to estimating costs and returns and net income of a particular enterprise.
It refers to estimating the returns for a part of the business i.e. one or few activities for example:
i. To estimate additional cost and returns from growing one hectare of hybrid Jowar in place of local Jowar.
ii. To estimate additional cost and returns by adopting foliar application of chemical fertilizers instead of soil application.
(b) Complete Budgeting/Total Budgeting:
It refers to preparing budget for the farm as a whole. Complete budgeting considers all the crops, livestock, methods of production and aspects of marketing in consolidated form and estimates costs and returns for the farm as a whole. Complete budgeting can be prepared for short run (annual budget) and for long run.
Advantages of Farm Budgeting:
(a) It evaluates the old plan and guides the farmers to adopt a new farm plan with advantage.
(b) It makes the farmer conscious of the waste (leakage) in the farm business.
(c) It gives comparative study of receipts, expenses and net earnings on different farms in the same locality and in different localities for formulating national agricultural policies.
(d It guides and encourages the most efficient and economical use of resources.
(e It It serves as valuable basis for improvements in farm management practices.
Related Articles:
Difference between Complete Budgeting and Partial Budgeting
Farm Budgeting: Definition, Importance, Objectives and Requirements
Farm budgeting app by Farmsoft controls entire fresh produce fruit and vegetable farm budgets: Prepare farm budget projections, monitor actual farm costs and farm budget performance.
Farm Budgeting : Partial Budgeting And Complete Budgeting
Farm Budgeting
After farm planning budgeting is undertaken. Budgeting is a method of analyzing plans for the use of agricultural resources at the command of the decision maker. Farm plan is a programme of the total farm activity of a farmer drawn up in advance. Farm plan serves as the basis of farm budgeting. Therefore farm plan can be prepared without a budget but budgeting is not possible without farm plan. Therefore the budge ting can be defined as under.
The physical aspects of farm planning when expressed in monetary terms called budgeting.
The expression of farm plan in monetary terms by estimation of receipts, expenses and net income is called budgeting.
Farm budgeting is a process of estimating costs, returns and net profit of a farm or a particular enterprise.
Budget is a statement of estimated income and expenditure.
We will be concerned with both planning and budgeting as the budget helps us to evaluate alternative plans and select the one that is most profitable. Therefore farm planning and budgeting go side by sides.
Types of farm budgeting: There are two types (methods) of farm budgeting.
a) Partial budgeting b) Complete budgeting.
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a) Partial budgeting: It refers to estimating costs and returns and net income of a particular enterprise. It refers to estimating the returns for a part of the business i.e. one or few activities for example
To estimate additional cost and returns from growing one hectare of hybrid Jowar in place of local Jowar.
To estimate additional cost and returns by adopting foliar application of chemical fertilizers instead of soil application.
b) Complete Budgeting: It is also called as total budgeting. It refers to preparing budget for the farm as a whole. Complete budgeting considers all the crops, livestock, methods of production and aspects of marketing in consolidated form and estimates costs and returns for the farm as a whole. Therefore complete budgeting can he specifically defined as “An estimation of the probable income and expenditure is made for the farm as a single unit of course, a complete budget is required when a farm plan is prepared for new farm or when drastic changes are suggested in the plan of the existing pattern on an established farm”. Complete budgeting can be prepared for short run (annual budget) and for long run.
Farm budgeting app by Farmsoft controls entire fresh produce fruit and vegetable farm budgets: Prepare farm budget projections, monitor actual farm costs and farm budget performance.
Tips for farm budgeting and planning
Having a budget for your farm is a great way to plan and track the financial performance of your business. Creating one can be simple, you just need to know where to get started.
The financial side of things can sometimes take a back seat to the daily challenges of running your business. You may have to deal with weather extremes, fluctuating commodity prices, seasonal labour shortages, or the demands of environmental compliance.
Dave Handley, Farmsoft General Manager of Agribusiness, says: “It’s when you’re dealing with issues like these, along with all your usual daily demands, that having sound financial management practices in place is so important.”
It’s not uncommon for farm owners and managers at different stages in their farming lives to need some guidance on how to manage cash flows and budgets, as there can be times when a drop in cash flow meets a sudden rise in costs, and a farm’s viability can take a hit.
“It’s not about obsessing over spreadsheets,” says Dave. “It’s about having some clear financial goals for your operation, and a plan for achieving them. At the core of all, that needs to be some sort of budget.”
Things to include in your farm budget
A budget focuses on estimating your income and expenditure for the 12 months ahead. Things such as:
income from different sources (e.g. milk or stock sales)
your farm’s working expenses (e.g. power, fuel, repairs, and maintenance)
interest, fees and lease payments
loan principal repayments
planned capital expenditure (e.g. stock, vehicles, or equipment) – it’s also worth considering different ownership models, i.e. leasing vs buying
future tax payments
your personal drawings or shareholder remuneration
3–5 year savings goals and ideal cash reserves (a safety net for more challenging seasons).
Dave points out that there’s no hard and fast format to stick to. “Do what works for you, so long as it’s realistic when compared to your financial performance in past years. There are plenty of online budgeting tools to choose from that make this a lot easier. Farmsoft has partnered with Figured to offer an online farm budgeting tool to our customers at discounted rates. And remember, if you need a hand, our team of Agribusiness Partners can always provide feedback.”
The benefits of having a financial plan
By creating a farm budget, you’re also generating an accurate, real-world view of how your year will pan-out. Of course, things can and will change, but it gives you some key markers to hit over the next 12 months, as well as a checklist to measure your farm’s financial progress against.
Benchmark, compare, and prepare
As Dave says, “Having a budget means you can sit down at the end of each quarter to check your actual performance against what you planned. This can help you identify shortfalls, work out what’s causing them, and address them before they become larger problems. Obviously, having a budget won’t stop the bad things from happening, but it will provide a degree of financial preparedness and resilience to help you deal with unexpected situations.”
There are other benefits too. Budgeting enables you to benchmark and compare your performance against industry averages, see where you have room for improvement, and test how resilient your business might be to a downturn.
Have better conversations with farm budgets
Having a financial plan for your farm also helps when you’re talking to the bank. Not only does it demonstrate you have a good handle on your business’ finances, it gives the bank a clear idea of your financial needs, and helps them work out how to best support you. Importantly, it also helps them assess whether you have the cash flow to service your debts. As Dave points out, “That’s where your budget also becomes a tool to develop a stronger relationship with your bank.”
Your farm budget can also put the spotlight on debt levels, which helps when you’re talking to the bank. As Dave says: “Having greater knowledge of your debt situation means our Agribusiness Partners can better structure finance in ways that help you minimise your interest and fee payments wherever possible.”
See the bigger picture
At the end of the day, a budget isn’t just about being better equipped to raise finance or better manage debt. It’s about the bigger picture – having some clear financial goals for your operation, and a plan for achieving them.
Many industry groups, like Farmsoft and Beef+Lamb, offer budgeting tools and workshops to help you understand the cash flows and financial performance specific to your sector. These can help you evolve your business thinking and get to know how others are managing their financials too. For more information, get in touch with your nearest Farmsoft branch, your Farmsoft Agribusiness Partner, or your Farmsoft Business Banker.
FARM BUDGETING SYSTEMS
Questions of how to best organize and manage the farm business in a manner consistent with the goals and objectives of the farm family must be continually addressed. The decision as to whether the considered alternatives are consistent with established goals and objectives rests upon the farmer and the farm family acting as the manager if no outside management is hired. Budgeting is a management tool that can provide information to answer a multitude of questions if used properly. Combining inputs into products, allocating resources to alternative products and choosing combinations of different products can be analyzed efficiently through the use of budgets.
The purpose of this OSU Extension Fact Sheet is to describe the different types of budgets available to farm managers. Several basic economic principles will be introduced that relate to the budgeting process.
Introduction
The agricultural producer or farm manager is faced with organizing and managing farm resources to maxi-mize economic returns to owned or controlled resources. Resources include land (owned and rented) and associated improvements, capital assets such as machinery and breeding livestock (borrowed and owned) and labor (hired, farm operator and additional family). The manager is responsible for combining available resources and knowledge to best achieve the desired goals and objectives of the farm business.
With budgets, management can begin to answer such questions as:
How may the available resources best be used?
What enterprises (crops and/or livestock) can be produced and which will contribute most to returns to owned resources?
How much of the controlled land should be devoted to each enterprise?
What equipment and machinery will be needed to produce the potential enterprises?
What production practices should be used to produce each of the enterprises?
How much labor (both family and hired) will be needed on the farm?
What are the capital requirements?
Farm management skills and knowledge are an integral part of financial success.
Resource Allocation
The problems of resource use and allocation involve the application of five economic principles. These principles, in a simplified form, consist of:
Adding units of an input as long as the value of the resulting output or added returns is greater than the added cost.
Substituting one input for another as long as the cost of the added input is less than the cost of the input that is replaced and the output is maintained.
Substituting one product for another as long as the value of the added output is greater than the value of the output that is replaced and the cost is constant.
Using each unit of resource where it gives the greatest returns when resources are limited.
Basing comparisons upon discounted values when considering different time periods and/or elements of risk.
The first three principles relate to situations where unlimited resources are available for use by the manager with perfect knowledge. The last two relate to situations where there are limited resources and when there is not perfect knowledge.
Most resource allocation management problems faced by farm managers can be addressed by applying the basic budgeting economic principles. Numerical calculations to assist in making management decisions. No one type of budget is tied to any particular principle. The type of budget relates to the intent of the analysis, while the principles relate to the farm resources and the resource relationships that exist.
Types of Budgets
There are three basic types of budgets that can be used in the farm business management process. Each type of budget provides different information to the manager for use in the decision-making process. The common thread in each type is that, if properly defined and used, the budget format permits the manager to use economic logic to answer questions of what, how much and when resources should be used to achieve the goals and objectives as established by the farm family.
The three types of budgets are:
Whole-farm budget
Enterprise budget
Partial budget
The whole-farm budget is a classified and detailed summary of the major physical and financial features of the entire farm business. Whole-farm budgets identify the component parts of the total farm business and determine the relationships among the different parts, both individually and as a whole.
An enterprise budget is a statement of what generally is expected from a set of particular production practices when producing a specified amount of product. It consists of a statement of revenues from and the expenses incurred in the production of a particular product. An enterprise budget documents variable and fixed costs. It is useful in calculating profitability and break-even values.
The partial budget is useful in analyzing the effects of a change from an existing plan. This budget only considers revenue and expense items that will change with a defined change in the plan.
Whole-Farm Budget
To develop a whole-farm budget:
List the goals and objectives of the farm firm.
Inventory the resources available for use in production.
Determine physical production data that will be used in the input/output process.
Identify reliable input and output prices.
Calculate the expected variable and fixed costs and all returns.
Since it is a plan for the future use of farm resources and establishes the future direction of the farm organization, the whole-farm budget must conform to the farm family goals and objectives to be successful. Farm management that is goal-directed integrates the goals and objectives of the farm with those of the family and reduces pressure on competitive uses of family controlled resources. OSU Extension fact sheet AGEC-244, “Goal Setting for Farm and Ranch Families,” can help develop a process for identifying farm and family goals, prioritizing them, and identifying management strategies that will achieve the identified goals (a worksheet is included). The whole-farm budget is the best tool to analyze the farm business and the impacts of the goals and objectives.
The whole-farm budget should start with the inputs the operator has available for use in the farm business. Often the amount of land and operating capital available are limiting factors. Other factors such as buildings, the farmer’s manage-rial skills and available markets can also be relatively fixed. It is important to start with those fixed elements in planning a whole-farm budget. The results of the whole-farm budget should combine the resources, constraints, technical information and price data into a realistic whole-farm budget for the farm being considered. The outcome should be a plan that can provide direction for the farmer and family to follow in maximizing the returns to owned resources.
An Enterprise Budget
Although managers lack information needed to make perfect decisions, they are forced to make decisions using information available, then must accept the risk associated with that decision. An enterprise budget provides a format for the manager to use in classifying information so the economics of alternative enterprises and alternative production systems can be consistently analyzed.
One problem in enterprise budgeting is the lack of in-formation concerning the amount of products that will result from particular combinations of inputs for example, how much forage would be produced with a certain amount of seed and fertilizer. Seldom do managers have certainty regarding technical production information as producers never have complete information with regard to production conditions, such as weather and insects. Typically, more information is available regarding the prices of inputs than on products since inputs are purchased during one time period and products are sold in a later time period. The greater lag between planning and actual use of information on product prices relative to input prices adds uncertainty and product price risk that must be considered when planning.
An enterprise budget should contain several components. A detailed description should include a production goal, the production techniques to be employed, the land resource required and even something about the capital and labor requirements. An enterprise budget should include all costs and all returns associated with the defined enterprise. All variable and fixed costs, both cash and non-cash items, should be included. The returns from products produced for sale (wheat grain crop) plus those produced for use in another enterprise (grazing) should be included in an enterprise budget.
Variable costs are the costs of such input items as seed, feed, fertilizer, normal repairs, custom operations and machinery and equipment operating expenses. These costs also include labor, whether associated with machinery or equipment or as hand labor operations. They are items that will be used during one year’s operation or during one production period and would not be purchased if the enterprise was not produced. Variable costs are always included in an enterprise budget.
Fixed costs are the costs associated with buildings, machinery, and equipment which are prorated over a period of years. Included in this category are depreciation, interest, insurance, and taxes on individual buildings and pieces of machinery and equipment that can be allocated to an individual enterprise. Fixed costs are always included in an enterprise budget.
Some costs of production are difficult to allocate to a specific enterprise. The costs are generally classified as overhead costs and include costs usually associated with buildings, utilities and other miscellaneous items (such as recordkeeping and budgeting) that are used in more than one enterprise and are not easily allocated to an individual enterprise. Overhead costs can include both variable and fixed costs. It is necessary to allocate all costs of producing an enterprise even if an arbitrary method of allocation must be used. The key to allocating costs is to develop a process that is consistent over time.
The OSU Agricultural Economics Department has developed software tools to assist producers in analyzing many Oklahoma crop and livestock enterprises. Information and sample reports are available at Enterprise Budgets Home.
The Partial Budget Concept
Partial budgeting is a procedure where receipts and expenses which increase/decrease with a change in organization or procedures are listed in a systematic order. It is a process to allow a total farm budget to be fine-tuned. It focuses the analysis of a defined change to see if it improves the total farm budget.
The steps in constructing a partial budget are to:
State the proposed alternative or change that will be analyzed.
Collect data on all aspects of the business that will be affected by the change.
Classify or group the types of impacts that will occur by including expenses increased or reduced and receipts increased or reduced.
The partial budget (example in Table 1) is based on the concept that a change in the organization of the business will have one or more of the following effects:
Table 1. Partial Budget, Wheat Grazeout versus Harvest for Grain.
Additional Costs1
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
Additional Returns
Interest on investment
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
$ 10.00
Steers: 790 lbs. x $1.35/lb.
$ 1,066.50
Additional vet., feed, etc
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
3.00
Reduced Returns
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
Reduced Costs
Steers: 640 lbs. x $1.52/lb
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
$ 972.80
Harvesting
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
$24/a + ($0.24/bu. x 14)
$ 27.36
Wheat Sales:
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
Hauling:
35 bu. x $4.00/bu
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
157.50
$0.24 x 35 bu./acre
7.70
Total annual additional costs and reduced returns
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
$ 1,143.30 (A)
Total annual additional returns and reduced costs
$1,101.56 (B)
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
- 1,143.30 (A)
Situation: Should I leave stockers on wheat pasture for 60 days rather than remove stockers and combine wheat?
Net change in income (B-A)
- $ 41.74
1Estimates are based on a stocking rate of one head per acre.
Positive Economic Effects
The change will eliminate or reduce some costs.
The change will increase returns.
Negative Economic Effects
The change will cause some additional costs.
The change will eliminate or reduce some returns.
The net change between positive and negative economic effects is an estimate of the net effect of making the proposed change in the total farm budget. A positive net change indicates a potential increase in income and a negative net change indicates a potential reduction in income due to the proposed change.
In the example, the total of the Additional Returns/Reduced Costs column is $1,101.56 and the total of the Additional Costs/Reduced Returns is $1,143.30. Subtracting the total of column A from B yields a net value of -$41.74 per acre. This represents the amount of economic loss with grazing out the wheat rather than selling the steers on March 1 and combining the wheat. Note that with different prices or stocking rates, the conclusion could be different. In some years, grazing out is the more profitable option so having accurate price forecasts is critical.
Sources of Budget Information
All budgets should be based upon the best information available. The reliability of the budgets is only as good as the quality of the data used in the process. Data needed for use in budgets includes quantity, price, method and timing of the inputs used.
Some sources of information available for use in preparing budgets are:
Actual farm records
Area summary analysis
County production data
Typical budgets
Farm literature
Information from meetings
Neighbors
Any or all of these sources should be used in collecting and verifying data or information used in preparing budgets. Good managers verify the reliability of data collected from any source to see that it applies to their situation. Experience from one year is only an indicator and does not assure that same response will result in following years.
Budget Limitations
Careful evaluation of the resource situation must precede the drawing of inferences from budgets. Farms with different owned resource situations can have different management plans given the same basic budget information. Budget data for a 160-acre farm can be used in preparing a budget for a farm of 320 acres; however, differences in resources and organization must be considered and adequately accounted for if the end result is to be reliable and useful.
Budgets are generally constructed to reflect future actions and it is difficult to accurately predict future prices and yields. Historical data provide some basis for establishing initial levels of budget yield, price and timing data. Several options are available in establishing future prices such as forward contracting and hedging techniques.
Production and marketing risks will limit budget reliability. Best estimates should be used to develop budgets for use in farm business analysis. However, high degrees of variability create risk to the operator and put pressure on the reliability of the estimates used in the enterprise budgets. One alternative is to evaluate best- and worst-case scenarios in addition to the expected outcome. Probability distributions on weather events and prices can add valuable insights. Even with careful use, errors can compound themselves to the point where budgets can have little or no value. This element of risk should be considered and evaluated by the manager when determining the solutions that best meet the goals and objectives of the farm family.
Budget preparation is time consuming. It requires pencil and calculator activity as well as searching data sources for information to be used in preparing the budget. Software also is available to assist in budget calculations. As with all problems, this becomes an economic question such that the farmer faces the problem of allocating their time in a manner whereby the returns from budgeting are greater than the cost of gathering the information.
Why Budget?
Using budgets can provide the farm manager a method to:
Experiment through simulation with possible outcomes of a given organizational change before resources are actually committed to the change.
Uncover cost items that might otherwise be overlooked.
Refine the present organization.
Seek credit from lending agencies.
Learn to better organize and reorganize.
Aids to the Process
The Department of Agricultural Economics has decision aids and materials available to assist farmers in building an information system, using information to develop all types of budgets and using budgets in management decisions. Meetings are held upon request throughout Oklahoma to provide the most current information available. Computer software has been developed to assist with the analysis and assimilation of data into the management framework.
Enterprise budgets developed by the Department of Agricultural Economics are available at Enterprise Budgets Home. Those interested in obtaining enterprise budgets may also contact their Extension Educators — Agriculture, Area Agricultural Economics Specialist, or State Agricultural Economics Specialist, Room 515, Agricultural Hall, OSU, Stillwater, OK 74078, (405) 744-9836 for more information.
Record keeping systems (both manual and electronic) as explained in OSU Extension Fact Sheet AGEC-302, “Information Systems for Oklahoma Farmers,” are available to help organize historical data for use in business management. One such affordable software program that is appropriate for farms and ranches requiring only cash records is Quicken. More information on using Quicken for farm financial record keeping is available from the OSU Department of Agricultural Economics at About Quicken. For smaller or less complex businesses, hand-kept ledgers may still be a satisfactory alternative. The Oklahoma Farm and Ranch Account Book is designed to be a comprehensive, easy to use, manual record-keeping system. A customized book can be built and printed for individual needs at OSU Farmbook. Other types of ledgers are often available from agricultural lenders, farm supply dealers, and farm management firms.
Summary
Budgets (whole-farm, enterprise, and partial) are management tools to help evaluate the farm business. Each type of budget has a different but related purpose and should be used by managers accordingly. The whole-farm budget becomes a starting point that can be used to analyze the farm business over time. Enterprise budgets can be used to analyze components of the farm business and also be a building block for the whole-farm. Once a whole-farm budget has been developed, a partial budget can be valuable in evaluating changes to the total-farm budget. Each type of budget offers useful information to support management decisions.
Farm budgeting app by Farmsoft controls entire fresh produce fruit and vegetable farm budgets: Prepare farm budget projections, monitor actual farm costs and farm budget performance.