Profitability Using Budgets
Budgets are the first step in any profitability analysis. The basic idea is easy: Revenue minus Cost. The devil is in the details: predicting prices received, quantities produced, and full costs. Three broad types of budgets each answer different questions:
- Enterprise budgets answer, “What will be my net earnings from this activity?”
- Partial budgets answer, “How would my net earnings change if I substitute a different enterprise or way of doing things?”
- Break-even budgets answer, “What would be the lowest price or yield I must receive in order to break even?”
Enterprise budgets and single-enterprise break-even budgets show profitability when they indicate a positive net income. But sometimes a manager is already earning a positive return from an enterprise that would be replaced by the one under examination. For that case, partial budgets and comparative breakeven analysis for changing enterprises are more informative.
- Using Enterprise Budgets in Farm Financial Planning: This Oklahoma State University bulletin explains each section of an enterprise budget, with examples for crop and livestock enterprise budgets.
- Interactive Enterprise Budgets: See examples at bottom of page.
- Partial Budgeting: A Tool to Analyze Farm Change: This Iowa State University site explains partial budgets in detail, using an example of a change from raising to buying replacement heifers for a dairy farm.
- Partial Budgeting: This eXtension site offers a description of the components of a partial budget, as well as an example about calculating machinery for harvest costs.
- Single-enterprise Break-even Analysis: This University of Tennessee document introduces break-even price and yield analysis for a single enterprise.
- Comparative Break-even Analysis for Changing Enterprises: The basic method for break-even analysis in single enterprises can be extended to look at changing enterprises. The key is to add the “opportunity cost” of net returns that would be foregone in giving up the old enterprise to the variable costs of the new enterprise. A Michigan State University Extension bulletin explains the approach with application to comparing alternative crops.
Sample Agricultural Enterprise Budgets:
- Enterprise Budgets: Michigan State University Extension offers a variety of downloadable enterprise budget spreadsheets for field crops, vegetables, fruits, nursery crops, and livestock.
- Budgets for Horticultural and Livestock Production: Penn State Extension’s “Ag Alternatives” site offers links to fact sheets that contain sample enterprise budgets for a variety of fruit, vegetable, field crop, and livestock enterprises.
- Online Budgets for Field Crops and Vegetables: University of Wisconsin Extension’s enterprise budget site can be used to navigate to detailed budgets for dairy and vegetables, as well as field crops and livestock.
- Cost and Return Budgets: Iowa State University Extension’s “Ag Decision Maker: Decision Tools Topics” site offers a variety of downloadable spreadsheets for budgeting crop and livestock enterprises. The site also includes price and cost information that are updated regularly.