ADVANCE ADVANCE AGRIBUSINESSAGRIBUSINESS

FARM RANCH BUSINESS FARM RANCH BUSINESS MANAGEMENTMANAGEMENT

SETTING GOALSSETTING GOALS

Why do we set goals?Why do we set goals?– 1. To plan for the future.1. To plan for the future.– 2. To keep from making emotional decisions 2. To keep from making emotional decisions

by having a plan, in writing.by having a plan, in writing.– 3. To enhance communication by getting all 3. To enhance communication by getting all

parties parties involved view points and inputs. involved view points and inputs.

5 GOAL SETTING STEPS5 GOAL SETTING STEPS 1. 1. Be specific.Be specific. 2. Set a time line.2. Set a time line. 3. Be realistic.3. Be realistic. 4. Write it down.4. Write it down. 5. Know what is involved to 5. Know what is involved to

obtain the goal and determine how obtain the goal and determine how important it is to you.important it is to you.

S.M.A.R.T.S.M.A.R.T. SPECIFICSPECIFIC MEASURABLMEASURABL

EE ATTAINABLEATTAINABLE REALISTICREALISTIC TIMELYTIMELY

SS

MM

AA RR TT

GIVE YOUR SELVES A HAND

DEFINING BUDGETSDEFINING BUDGETS

Budgets are planning tools.Budgets are planning tools. Budgets help you compare income Budgets help you compare income

and expenses for different and expenses for different enterprises and alternative plans of enterprises and alternative plans of actions.actions.

Budgets help you form your course of Budgets help you form your course of action.action.

Types of BudgetingTypes of Budgeting

Cash flow budget.Cash flow budget. Enterprise budget. Enterprise budget. Partial budget.Partial budget. Whole-farm or ranch plan and Whole-farm or ranch plan and

budget.budget. Family living expenditure budget.Family living expenditure budget. All budgeting starts with making a All budgeting starts with making a

planplan

CASH FLOW BUDGETCASH FLOW BUDGET

What is a Cash Flow Budget?What is a Cash Flow Budget?

EstimateEstimate of all cash receipts. of all cash receipts. EstimateEstimate of all cash expenditures. of all cash expenditures. Cash expense occurring in a certain Cash expense occurring in a certain

time period.time period. MonthlyMonthly BimonthlyBimonthly QuarterlyQuarterly YearlyYearly

Records only money movement.Records only money movement.

Estimate and CashEstimate and Cash

Management ToolManagement Tool

Goal planning.Goal planning. Tests your farm plan.Tests your farm plan. Projects operating credit needs and time Projects operating credit needs and time

frame.frame. Loan repayment schedule.Loan repayment schedule. Compare to actual cash flow.Compare to actual cash flow. Communicate you farming plans to others.Communicate you farming plans to others. Use past financial and production records.Use past financial and production records.

Cash Flow BudgetCash Flow BudgetMaking a PlanMaking a Plan

Outline ExampleOutline Example Production plans for the year.Production plans for the year.Crop production plansCrop production plans

500 acres of corn500 acres of corn400 acres of soybeans400 acres of soybeans50 acres of hay50 acres of hay80 acres of pasture80 acres of pasture

Livestock production plansLivestock production plans224 litters, farrow to finish swine224 litters, farrow to finish swine

Take InventoryTake Inventory Livestock on hand.Livestock on hand. Crops in storage now.Crops in storage now. Use a recent financial balance sheet Use a recent financial balance sheet

Estimate Feed RequirementsEstimate Feed Requirements

Use county enterprise budgetsUse county enterprise budgets Use your past feed records.Use your past feed records.

Estimate Feed AvailableEstimate Feed Available

Beginning InventoriesBeginning Inventories Estimate the quantity of feed purchases neededEstimate the quantity of feed purchases needed Quantity available to sell.Quantity available to sell. Adjust the livestock program to fitAdjust the livestock program to fit

Enterprise No. of units Bu. Needed Total Bu.

Litters Per unit needed

Farrow to finish 224 105 23,520

Enterprise No. of Yield per Beg Inv Harvest Totals

Acres Acres

Corn 500 135 42,500 67,500 110,000

Available to sell 86,480

Actual Actual CashCash Flow Budget Flow BudgetIncome or Cash InflowIncome or Cash Inflow

CashCash on hand. on hand. Livestock sales.Livestock sales.

Livestock on hand.Livestock on hand. Livestock to be produced during the year.Livestock to be produced during the year. Exclude animals to be carried over to next year or Exclude animals to be carried over to next year or

held back for breeding stock.held back for breeding stock.

Include sales of breeding stock that will be Include sales of breeding stock that will be culled.culled.

Livestock product sales.Livestock product sales. milk or wool.milk or wool.

Things to RememberThings to Remember

Reflect expected seasonal price patterns.Reflect expected seasonal price patterns. Stay on the conservative side.Stay on the conservative side. Prepare budgets at two or three price Prepare budgets at two or three price

levels.levels.

Plan Sales of Non-feed Crops Plan Sales of Non-feed Crops and Excess Feedand Excess Feed

Consider crops in inventory.Consider crops in inventory. Beginning of the year.Beginning of the year. Crops to be harvested.Crops to be harvested. Carry over grain for feed for next year.Carry over grain for feed for next year. Other crops normally sold in the following year.Other crops normally sold in the following year.

Plan timing of sales.Plan timing of sales. Estimating Crop Prices.Estimating Crop Prices.

Outlook forecasts.Outlook forecasts. Seasonal price patterns.Seasonal price patterns. Conservative price estimates.Conservative price estimates.

revise your marketing plans to meet capital needs.revise your marketing plans to meet capital needs.

Estimate Income from Other SourcesEstimate Income from Other Sources

Government payments.Government payments. Custom machine work income.Custom machine work income. Income from off-farm work, rental property, Income from off-farm work, rental property,

or other business activities.or other business activities. Interest, dividends, patronage refunds, etc.Interest, dividends, patronage refunds, etc.

Project Crop Project Crop ExpensesExpenses and Other Farm and Other Farm andand

Family Living Family Living ExpendituresExpenditures Use last year’s Use last year’s expenditures.expenditures. Detailed field-by-field production plans or field maps.Detailed field-by-field production plans or field maps. Contract agreements.Contract agreements.

property taxes, property.property taxes, property. Liability insurance premiums.Liability insurance premiums. Fixed cash rents.Fixed cash rents.

Last year’s living Last year’s living expensesexpenses for changes in. for changes in. Family circumstances.Family circumstances. Inflation.Inflation.

Tax estimate.Tax estimate. ExpensesExpenses should be spaced through the year. should be spaced through the year.

Place Place expensesexpenses during period of payment, not use. during period of payment, not use. Use your best judgment.Use your best judgment. Remember seasonal peaks.Remember seasonal peaks.

Estimate Operating Surplus.Estimate Operating Surplus.

Add total projected Add total projected cash inflowscash inflows for the for the year and for each month.year and for each month.

Add total projected Add total projected cash outflowscash outflows for the for the year and for each month.year and for each month.

Subtract total Subtract total cash outflowscash outflows from total from total cash inflowscash inflows to determine net operating to determine net operating surplus.surplus.

Consider Capital PurchasesConsider Capital Purchases

Machinery & equipment.Machinery & equipment. Land.Land. Additional breeding livestock.Additional breeding livestock. Major machinery Major machinery expensesexpenses.. Construction or improvement of buildings.Construction or improvement of buildings.

Summarize Debt RepaymentSummarize Debt Repayment

Recent financial statement.Recent financial statement. Debts that you have already acquired.Debts that you have already acquired. Calculate the interest.Calculate the interest.

Calculate the Cash Flow Calculate the Cash Flow Surplus or DeficitSurplus or Deficit

Add the operating surplus for each month Add the operating surplus for each month to New Term Loansto New Term Loans

Subtracting capital purchases and loan Subtracting capital purchases and loan paymentspayments

Positive EstimatesPositive Estimates Negative EstimatesNegative Estimates

YOU SURVIVED !!!!!!!

Enterprise BudgetsEnterprise Budgets

What is an Ag Enterprise?What is an Ag Enterprise?

What is an Enterprise Budget?What is an Enterprise Budget?Enterprise budgets record:Enterprise budgets record:

Income or revenue.Income or revenue. Expenses.Expenses. Returns (profits or losses).Returns (profits or losses). For a single crop or livestock production center.For a single crop or livestock production center.

Enterprise budgets help determine.Enterprise budgets help determine. Should an enterprise be expanded or eliminated.Should an enterprise be expanded or eliminated. They help to compare management practices.They help to compare management practices.

Enterprise budgets are typically one unit measurements.Enterprise budgets are typically one unit measurements. One acre for crops.One acre for crops. One head for livestock.One head for livestock. This permits easy comparisons between different enterprises.This permits easy comparisons between different enterprises.

Enterprise budgets are usually for one year.Enterprise budgets are usually for one year.

Enterprise BudgetsEnterprise BudgetsA Management ToolA Management Tool

Types of Enterprise Budgets.Types of Enterprise Budgets. Planning Enterprise Budget.Planning Enterprise Budget. Financial Analysis Enterprise Budget.Financial Analysis Enterprise Budget.

Identify the most profitable enterprises.Identify the most profitable enterprises.

Provide a basis for partial budgeting.Provide a basis for partial budgeting.

They contain data needed to compute.They contain data needed to compute. Cost of production.Cost of production. Break-even analyses.Break-even analyses.

SINGLE: SINGLE: Single enterprise.Single enterprise. single unit.single unit.

Incomes must be kept separately.Incomes must be kept separately.

Expenses must be kept separately.Expenses must be kept separately.

Record transfers from one enterprise to Record transfers from one enterprise to another with in the farm.another with in the farm.

Allocation of costs.Allocation of costs. Electricity.Electricity. Water.Water. Certain feeds. Certain feeds.

Format of an Enterprise BudgetFormat of an Enterprise Budget

Four Parts.Four Parts. Income/receipts/revenue.Income/receipts/revenue. Variable or operating expenses.Variable or operating expenses. Fixed expenses.Fixed expenses.

A bottom line or summaryA bottom line or summary

Income/Receipts/RevenueIncome/Receipts/Revenue

The name of the revenue. The name of the revenue.

Source.Source.

Quantity. Quantity.

Unit. Unit.

Price per unit. Price per unit.

Additional ConsiderationsAdditional Considerations

PricingPricing

IncomeIncome Definitions DefinitionsCash payments for production sold (crops, Cash payments for production sold (crops, livestock, or livestock production).livestock, or livestock production).

Government program payments.Government program payments.

Cash insurance payment for damages.Cash insurance payment for damages.

Non-cash revenues for feed fed to other internal Non-cash revenues for feed fed to other internal livestock enterprises. livestock enterprises.

Non-cash revenues for livestock transferred to Non-cash revenues for livestock transferred to other internal livestock enterprises.other internal livestock enterprises.

Non-cash revenues for residue.Non-cash revenues for residue.

CostsCosts

Operating Cost, Variable Costs, Direct Costs.Operating Cost, Variable Costs, Direct Costs. Labor Costs.Labor Costs.

Capital Costs, Fixed Costs, Indirect Costs.Capital Costs, Fixed Costs, Indirect Costs.

Labor Costs.Labor Costs.

OPERATING COSTSOPERATING COSTS CAPITAL COSTSCAPITAL COSTS

VARIABLE COSTSVARIABLE COSTS FIXED COSTSFIXED COSTS

DIRECT COSTSDIRECT COSTS INDIRECT COSTSINDIRECT COSTS

Allocating Allocating CostsCosts

Based on intent.Based on intent. Major use by more then one enterprise.Major use by more then one enterprise. Major use by one enterprise.Major use by one enterprise.

Unpaid labor & management (operator's Salary). Unpaid labor & management (operator's Salary).

Cost and Returns SummaryCost and Returns Summary

ReturnsReturns Over Over Operating CostsOperating Costs or Gross Margin. or Gross Margin.

Return to Labor and Management.Return to Labor and Management.

Profit/Loss.Profit/Loss.

IncomeIncome - - OP CostsOP Costs = GM = GM

GM – GM – Fixed CostsFixed Costs = Return to Labor = Return to Labor

Return to Labor – Return to Labor – Labor CostsLabor Costs = Profit/Loss = Profit/Loss

SummarySummaryEnterprise budgets can be used as a planning tool or an Enterprise budgets can be used as a planning tool or an analysis tool. analysis tool. They can help the farm manager better understand the pros They can help the farm manager better understand the pros and cons of a component of their business. and cons of a component of their business. Producing sound enterprise budgets requires: Producing sound enterprise budgets requires:

Detailed understanding of an enterprise’s production practicesDetailed understanding of an enterprise’s production practicesGenerating income.Generating income.Incurring variable costs.Incurring variable costs.Fixed costs. Fixed costs.

An understanding of the basic budgeting framework. An understanding of the basic budgeting framework.

Sound enterprise budgets provide more information than just Sound enterprise budgets provide more information than just the enterprise’s profitability. the enterprise’s profitability.

They identify the most profitable enterprises on a farm.They identify the most profitable enterprises on a farm. They provide the basis for partial budgeting and cost of production They provide the basis for partial budgeting and cost of production

calculations.calculations. They can be used to produce break-even price and/or production They can be used to produce break-even price and/or production

analysis.analysis.

Two down Two to go

PARTIAL BUDGETINGPARTIAL BUDGETINGA TOOL TO ANALYZE A TOOL TO ANALYZE

FARM BUSINESS FARM BUSINESS

CHANGESCHANGES

What is a Partial Budget?What is a Partial Budget?

Evaluates the financial effect of Evaluates the financial effect of incremental incremental changeschanges..

Includes resources that will be Includes resources that will be changedchanged.. Does not consider the resources in the Does not consider the resources in the

business that are left unbusiness that are left unchangedchanged..

Partial Budgeting PrinciplesPartial Budgeting Principles

1.1. Increase in Increase in incomeincome..

2.2. Reduction or elimination of Reduction or elimination of costscosts..

1.1. Increase in Increase in costscosts..

2.2. Reduction or elimination of Reduction or elimination of incomeincome..

Partial Budget ComponentsPartial Budget Components The left hand column has items that increase The left hand column has items that increase

incomeincome.. right hand column has items that right hand column has items that reduce reduce

incomeincome. .

The top half deals with income The top half deals with income increaseincrease and and decreasesdecreases..

The bottom half reports expenses The bottom half reports expenses decreasesdecreases and and increasesincreases..

a subtotal for each column.a subtotal for each column. a grand total.a grand total.

Added Income Added Income

Use realistic yields, product quality and Use realistic yields, product quality and prices.prices.

Use average prices.Use average prices. Use average quality.Use average quality.

Added CostsAdded Costs

Increased expenses.Increased expenses.• Costs of production.Costs of production.• Non-cash costs.Non-cash costs.

Labor. Labor. Depreciation.Depreciation.

Reduced Costs Reduced Costs

Crop or livestock expenses no longer Crop or livestock expenses no longer incurred.incurred.

Non-cash costs.Non-cash costs.

Partial Budget SummaryPartial Budget Summary

Total each of the two factors in column 1.Total each of the two factors in column 1. Repeat the process for column 2.Repeat the process for column 2. Then take column 1 (added Then take column 1 (added

income/reduced cost) and subtract income/reduced cost) and subtract column 2.column 2.

A positive number indicates a profit.A positive number indicates a profit.

ExampleExample

ConclusionConclusion

Systematic approachSystematic approachEstimateEstimateRepeating the analysis using Repeating the analysis using

different assumptionsdifferent assumptionsRisk managementRisk management

CELEBTATION TIME!!!!!

WHOLE FARM BUDGETSWHOLE FARM BUDGETS

WHAT IS A WHOLE FARM BUDGET?WHAT IS A WHOLE FARM BUDGET? The last step in the budget process.The last step in the budget process. Estimate cash Estimate cash inflowinflow, , outflowoutflow and liquidity. and liquidity. Compare alternative plans for:Compare alternative plans for:

Profitability.Profitability. Liquidity.Liquidity.

Evaluate the effects of changing other parts of the farm Evaluate the effects of changing other parts of the farm plan.plan.

Estimate the need and availability of resources.Estimate the need and availability of resources. Land.Land. Capital.Capital. Labor.Labor. Feed.Feed. Irrigation water.Irrigation water.

Present farm plan to:Present farm plan to: Banker.Banker. Landlord.Landlord. Partner.Partner.

Building a Whole Farm BudgetBuilding a Whole Farm Budget

Parts of the budget:Parts of the budget: IncomeIncome..

Variable Variable ExpensesExpenses.. Fixed Fixed ExpensesExpenses..

Bottom Line.Bottom Line.

Income or RevenueIncome or Revenue

Calculated by multiplying the Calculated by multiplying the incomeincome per unit by the number of units to be per unit by the number of units to be produced.produced.

Other Other incomeincome..

Variable CostVariable Cost

Calculated by multiplying the Calculated by multiplying the costscosts per unit by the number of units to be per unit by the number of units to be produced.produced.

Fixed CostsFixed Costs

CostsCosts not already included with any other not already included with any other enterprises.enterprises.

Net Farm IncomeNet Farm Income

Add the variable and fixed Add the variable and fixed expensesexpenses together to get total expenses.together to get total expenses.

Subtract the total expenses from the Subtract the total expenses from the total total incomeincome..

Alternative PlansAlternative Plans

Analyses the budget.Analyses the budget. Long-Range budgets.Long-Range budgets.

Use Long-term price averages.Use Long-term price averages. Use long-term yield averages.Use long-term yield averages.

THE END