Enterprise Analysis Guidance | PRINT THIS

Using Enterprise Budget Analysis

Enterprise budgets represent estimates of receipts (income), costs, and profitability associated with the production of agricultural products. The information contained in the enterprise budgets can be used by agricultural producers, extension specialists, financial institutions, governmental agencies, and other advisers making decisions in the food and fiber industry.

 

Budgets are used to:

Itemize the receipts (income) received for an enterprise

List the inputs and production practices required by an enterprise

Evaluate the efficiency of farm enterprises

Estimate benefits and costs for major changes in production practices provide the basis for a total farm plan

Support applications for credit
 

Enterprise budgets should contain receipts (income) for every product and by-product of the enterprise. Prices used should reflect market values and productivity of enterprise resources (land, labor, equipment, etc.) Enterprise budgets should be prepared with specific objectives in mind. Receipts and costs often are difficult to estimate in budget preparation because they are numerous and variable. Therefore, you should think of using sample budgets as a first approximation and then make appropriate adjustments that reflect your specific production situation. Enterprise budgets contain several cost components. Determining the costs of production practices can be difficult. Individuals often disagree over which costs to include and how they should be measured. Understandably, these differences arise because production costs are unique to each resource situation. An important financial distinction is the concept of variable and fixed costs.

 

Variable costs are those expenses that vary with output within a production period. Examples include expenses for feed, marketing, herd health, breeding, seed, fertilizer, chemicals, fuel, repairs, and hourly or seasonal labor. Other terms used to describe variable costs include cash costs (or expenses), direct costs, and out-of-pocket costs. Fixed costs do not vary with the level of output. They include depreciation, taxes, interest on investment, land charges, salaried labor, and insurance. Sometimes a management fee also is included as a fixed cost. Indirect, non-cash, and overhead costs are other terms used to describe fixed costs.

 

Total costs are variable and fixed costs added together. While an enterprise should earn a profit above total costs, this is not always possible. Income received often is less than total production costs. Should an enterprise be continued under these circumstances? The answer may be yes if (1) returns are above variable costs and (2) this is a short-term condition. If fixed costs are not covered in the long run, however, reinvestment in capital items (such as tractors, implements, buildings, and equipment) cannot be made and existing capital stock eventually is depleted.

Enterprise Planning and Financial Management

Enterprise budgets also are very useful in selecting the mix of enterprises which will be undertaken on the farm. They can be used to provide an estimate of overall profitability and resource requirements (land, machinery, labor). Budgets also can be used to estimate borrowing needs and cash flow for the farming operation. When borrowing money to finance operations, you can show that you have carefully evaluated potential earnings and credit needs with a good set of enterprise budgets.

 

Source:Agricultural Alternatives Project at Pennsylvania State University with support from the U.S. Department of Agriculture-Extension Service