By Roelof Bezuidenhout
Did you know that there are three types of budgets you can use together for more reliability and accuracy? Oklahoma State University (OSU) Extension offers this useful advice.
Many farmers budget by relying on their memory, and don’t write anything down. Some farmers do their sums on paper. Realistic farmers take an educated guess of what they’re likely to earn over the next month, six months or year, then subtract 25% or so from that figure in case the market drops or something goes wrong on the farm. Then they roll the dice on their spending and add 25% as a buffer in case costs skyrocket. Others are simply wishful thinkers.
Without some kind of budget, you cannot plan for anything – not for farm improvements and not for a family holiday. OSU says a budget can, at the very least, allow you to:
1. Experiment on paper with potential outcomes of a change in your farming operation.
2. Uncover cost items that might otherwise be overlooked.
3. Get credit from a bank.
The reliability of a budget depends on the quality of the information behind it. You have to make decisions based on available data, such as quantity, price, and the method and timing of your inputs. While experience from a previous year can offer valuable insight, it doesn’t guarantee that you’ll have the same outcome the next year. It is important to evaluate both best- and worst-case scenarios.
You can decide how simple or complicated your budgeting should be. OSU’s state-of-the-art approach is probably too advanced for most ordinary farmers, but just reading through their pointers will give you a better idea of what’s important. It takes into consideration that most farmers don’t work in isolation, but have to consider their family’s interests and goals.
Some terminology
First, what are resources? They include land (owned and rented) and associated improvements, capital assets such as machinery and breeding livestock (borrowed and owned), and labour (hired, farm operator and additional family). Knowing what your resources are, you can start to answer the following questions:
• What is the best way to use the available resources?
• What enterprises (crops and/or livestock) can be produced that maximise returns?
• How much land should be given to each enterprise?
• What machinery and equipment are needed?
• How much labour (both family and hired) will be needed?
• How much money will be needed?
Other terms that always crop up in business plans:
• Variable costs are the costs of input items such as seed, feed, fertiliser, normal repairs, labour, and machinery and equipment operating expenses.
• Fixed costs are the costs associated with buildings, machinery and equipment, which are valued over a period of years. Depreciation (the value of something decreases over time) is included in this category, and so is insurance on buildings and machinery.
• Overhead costs are expenses like water and electricity, and other miscellaneous items 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.
To get back to the budgets… OSU identifies three types, each providing different information for decision-making: whole-farm budget, enterprise budget and partial budget.
• A whole-farm budget integrates the goals and objectives of the farm with those of the family. It will help to reduce pressure on competitive uses of family-controlled resources. It sets out all the goals and objectives of both the farmer and the family, and includes an inventory of the resources available for production. A whole-farm budget also includes the physical production data that will be used in the input/output process, reliable input and output prices, and a calculation of the expected variable and fixed costs and all returns. A realistic whole-farm budget is a plan for the future use of farm resources.
• An enterprise budget should include several components, including a production goal, the production techniques that will be used, the land required, and capital and labour requirements. It should also include all costs and all returns associated with an enterprise, including all variable and fixed costs. An enterprise budget provides a format for the farmer to use so he or she can consistently analyse the economics of alternative enterprises and alternative production systems.
• A partial budget is useful in analysing 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.
You can probably get away with doing only a whole-farm budget until you get the hang of things.
To summarise, all three budget types are management tools to help evaluate the farm business. The whole-farm budget becomes a starting point that can be used to analyse the farm business over time. Enterprise budgets can be used to analyse components of the farm business. 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.
Get a more detailed explanation here.
Source: Oklahoma State University (OSU) Extension
