FACT SHEET: Part 4—Creating a budget

Practical numbers, quicker than you think

By Michelle Frain, Marketing Coordinator for the Rodale Institute and Christine Ziegler, Editor

Posted June 23, 2005

RESOURCES

Regional budget and cost information from around the country, including links to enterprise budgets, conservation costs, and budgeting software put out by agricultural economics departments, extension agencies and government organizations.
http://waterhome.tamu.edu/
care/budgets/

Farm Select- a tool that lets you do simple side-by-side comparisons of conventional and organic management on your own farm, using your own numbers, including enterprise budgets for each crop.
http://www.newfarm.org/
farmselect/
or www.farmselect.org

"Using Enterprise Budgets to Make Decisions about Your Farm"- a budgeting fact sheet with excellent explanations of interest, depreciation, and other budget features.
http://cru.cahe.wsu.edu/
CEPublications
/pnw0535/pnw0535.pdf

Enterprise Budgets - Penn State Cooperative Extension, The Pennsylvania State University, 112 Agricultural Administration Building, University Park, PA, 16802; (814) 865-6713 - corn grain, corn silage, and dairy budgets.
http://farmmanagement.
aers.psu.edu/FMbudgets.htm

Farm Management, Rutgers Cooperative Extension, Cook College, Rutgers, The State University of New Jersey, 88 Lipman Dr., New Brunswick, NJ, 08901-8525; (732) 932-9306 – budgets for field crops and greenhouse production (includes some organic production information as well). http://aesop.rutgers.edu/
~farmmgmt/index.html

OSU Farm Management Information Resources, The Ohio State University, 103 Agricultural Administration, 2120 Fyffe Rd., Columbus, OH, 43210-1067; (614) 688-3959 – budgets for field crops under various tillage regimes, all kinds of livestock, dairy, specialty crops, equine businesses, aquaculture, perennial and orchard fruit crops, and Christmas trees, along with Ohio calculators for land values, custom rates, grain storage, and prices.
http://aede.ag.ohio-state.edu/
people/moore.301/index.htm

Interactive Enterprise Budgets, University of Georgia – budgets for some field crops, livestock, and a few vegetables, including excellent instructions and explanations.
http://www.ces.uga.edu/
Agriculture/
agecon/interactive.htm

Cost and Return Studies, Department. of Agricultural and Resource Economics, UC Davis, One Shields Ave., Davis, CA, 95616; (530)752-4424 – many kinds of vegetable crop budgets.
http://www.agecon.ucdavis.edu/

Tools for better decisions - Budgets, Utah State University, Logan, UT, 84322; (435) 797-1000 – budgets for field crops, livestock, and specialty crops.
http://extension.usu.edu/
cooperative/agribusiness/
index.cfm/cid.273/tid.421

Enterprise Budgets, 520 Ag Hall, Oklahoma State University, Stillwater, OK, 74078; (405) 744-7075 – budgets for field crops, cow/calf operations, forage pasture and hay, some perennial and orchard fruit crops, and pecans, along with budget software.
http://www.agecon.okstate.edu/
budgets/

Agronomic Crop Enterprise Budgets, Department of Applied Economics & Statistics, Clemson University, Clemson, SC, 29634 - budgets for field crops under various tillage regimes, including instructions that include equations to calculate equipment repairs and fuel use.
http://cherokee.agecon.
clemson.edu/crop_bud.htm

Machinery cost estimates, or farmdoc Project, 406 Mumford Hall, 1301 W. Gregory Dr., Department of Agricultural and Consumer Economics, College of Agricultural, Consumer and Environmental Sciences, University of Illinois at Urbana-Champaign, Urbana, IL 61801; (217)333-2792 – farm machinery cost estimates, per hour and per acre.
http://www.farmdoc.uiuc.edu/
manage/machinery/

"Budgeting Farm Machinery Costs", (877) 424-1300 - a fact sheet on budgeting farm machinery costs (money values are Canadian, but the concepts do not require conversion).
http://www.gov.on.ca/OMAFRA/
english/busdev/facts/
01-075.htm

"Machine Management - Estimating Farm Machinery Costs" - an excellent, comprehensive booklet on machinery costs from Iowa State University.
http://www.extension.
iastate.edu/Publications/
PM710.pdf

Agricultural Management E-School - Farm Machinery Economics- an online course on farm machinery economics made available by Iowa State University.http://www.extension.
iastate.edu/ames/fme.htm

"Farm Machinery Economic Cost Estimates for 2005"- another excellent booklet on machinery costs from the University of Minnesota.
http://www.extension.umn.edu/
distribution/
businessmanagement/
DF6696.pdf

Agronomy Guide 2005-2006, Penn State Cooperative Extension, The Pennsylvania State University, 112 Agricultural Administration Building, University Park, PA, 16802; (814) 865-6713 – an online source to obtain the Pennsylvania State Agronomy Guide.
http://agguide.agronomy.
psu.edu/

“Assessing and Improving Farm Profitability”, Fact Sheet #539, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/MCE
/Publications/PDFs/FS539.pdf
.

“Assessing and Improving Farm Cash Flow” Fact Sheet #541, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/MCE/
Publications/PDFs/FS541.pdf
.

“Assessing and Improving Your Farm Solvency”, Fact Sheet #540, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/MCE/
Publications/PDFs/FS540.pdf
.

“Cost and Revenue Considerations in Farm Management Decision Making”, Fact Sheet #546, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/
MCE/Publications/
PDFs/FS546.pdf
.

“Enterprise Budgets In Farm Management”, Fact Sheet # 545, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/MCE/
Publications/PDFs/FS545.pdf
.

“Managing Risk In Agriculture”, NCR#406, Purdue University Extension, West Lafayette, IN, 47907; (888) 398-4636 (EXT-INFO). http://www.ces.purdue.edu/
extmedia/NCR/NCR-406.html
.

“Measuring and Analyzing Farm Financial Performance” (publication and web site), Purdue University Extension, West Lafayette, IN, 47907; (888) 398-4636 (EXT-INFO). http://www.agecon.purdue.edu/
extensio/finance/
.

“The Projected Cash Flow Statement”, EC-616, Purdue University Extension, West Lafayette, IN, 47907; (888) 398-4636 (EXT-INFO). http://www.ces.purdue.edu/
extmedia/EC/EC-616.html
.

“Diagnosing Your Farm’s Financial Health”, Fact Sheet #538, University of Maryland, College of Agriculture and Natural Resources, Symons Hall, College Park, MD 20742. http://www.agnr.umd.edu/MCE/
Publications/PDFs/FS538.pdf
.

“Checking Your Farm Business Management Skills”, ID-237, Purdue University Extension, West Lafayette, IN, 47907; (888) 398-4636 (EXT-INFO). http://www.ces.purdue.edu/
extmedia/ID/ID-237.pdf

Once you know your different types of costs (Part 2) and have created a system to capture them (Part 3), you need to decide how you want to use your cost numbers. There are four distinct kinds of budgets into which you can plug your cost and income data:

  • Enterprise budget: records the costs and income from the production of one single type of farm product, during one cycle of production. For example, if your farm produces poultry, beef, hay, corn, and soybeans, you will create an individual enterprise budget for each of these five products, covering a single crop growing season, or one animal life cycle. These budgets are usually developed on a per-acre or per-head basis.
  • Whole farm budget: adds the costs and income from each enterprise budget, along with other miscellaneous income and expenses, to determine total expenses and income for the farm as a whole. This kind of budget includes off-farm income and other small-scale miscellaneous work, expenses, and income.
  • Partial budget: measures the effects of small changes in a farm operation, leaving out unaffected parts of the overall farm budget. This kind of budget provides quick information to help guide smaller-scale decisions, such as changes in a production practice, or choosing between hired custom harvesting and an equipment purchase.
  • Cash flow budget: tallies the cash receipts and expenses of the farm over a fixed time period (usually a year). This budget shows whether or not expected total cash income will be adequate to cover cash expenses, which is useful to assess major purchase, and to plan loan repayment or new borrowing.

Of these four types of budgets, an enterprise budget is usually considered to be the most useful because it is the basis on which all the other types of budgets are built, and because it provides practical cost information that you can use right away and over time.

A yearly enterprise budget can help you to:

  1. Set reasonable production goals for each of your farm products,
  2. Accurately calculate your costs of production for each product,
  3. Estimate the break-even price and net return you need from each product in order to cover all your costs and make a profit,
  4. Choose management strategies that can help you achieve your production and price goals,
  5. Identify problems that can cause you to miss your production and price goals,
  6. Compare the returns you make from each of your farm products, to better assess and plan for the profitability of the whole operation, and
  7. Quickly gather important information for business planning and loan applications.

Of course, the value and usefulness of any budget depends on the type and quality of numbers you plug into it. A good record keeping system, like the one described in the Record Keeping fact sheet, can: 1) help ensure that your budget numbers are as accurate as possible, and 2) identify which numbers are “spot on” or “less than perfect”.

At the same time, the numbers you use in your budget will depend on the budget accounting style you choose. Any budget can be presented in one of two different accounting styles:

  • Economic accounting: includes cash or numeric values for all inputs and outputs, including operations and transactions that aren’t cash based, such as use of farm-raised feeds for livestock, or use of livestock manure as an ingredient in compost. Economic accounting works best for enterprise and whole farm budgets and is often useful for partial budgets.
  • Financial accounting: lists only inputs and outputs that require actual cash transactions. Financial accounting works best for cash flow budgets and, sometimes, for partial budgets.

In most cases, economic accounting creates a better, more complete budget, especially if you’re developing an enterprise budget. Also, if you start with economic accounting, it’s very easy to pull out the basic financial accounting numbers when you need them.

However, don’t get discouraged if you’re not able to fill in all the blanks in an economic accounting budget. To reiterate the most important point of budgeting and cost calculations, a few numbers are better than no numbers at all! It’s good enough to plug in the numbers you have to get started. Just be sure to make an effort to fill in the “blanks” as time goes on.

Enterprise budget work sheets can vary from “short and simple” to “long and comprehensive”, depending on the amount of detail you want to include. Of course, the more detail you include, the more informative your budget will be. For example, by individually listing each fertility amendment you add to the soil (rather than lumping them in a general category of “Fertilizers” or “Soil Amendments”), you can easily see what amendments you’ve used from year to year and how much you spent on each. That information can help you assess the cost/benefit ratio of each amendment, giving you another valuable tool to guide your future plans.

However, increased budget detail does not necessarily increase your budget’s accuracy. Accuracy depends entirely on the quality of the numbers you plug in. Even the shortest budget will be accurate, as long as you keep good records and include all the costs that fall under each category (drawn from a good record keeping system).

The following work sheet is a “standard” crop enterprise budget (in economic style) that you can start using right now, if you want. To help you choose the level of detail you want to include, some cost categories are followed with a list of possible sub-headings that you might want to use for greater detail. Feel free to include even more detail if it’s useful to you!

CROP ENTERPRISE BUDGET

RECEIPTS

         
       
         
           
TOTAL RECEIPTS
(add the above items):
       
           
VARIABLE COSTS          
       
       
       
       
       
       
       
         
       
         
         
         
       
       
       
       
         
       
       
         
       
       
         
         
           
TOTAL VARIABLE COSTS:        
           
FIXED COSTS          
       
       
       
       
       
Interest
       
       
       
       
       
         
       
       
       
       
         
         
         
         
         
           
TOTAL FIXED COSTS:        
           
TOTAL COSTS
(variable + fixed):
       
           
RETURN TO MANAGEMENT (total receipts - total costs):        
           

Though livestock budgets contain some very different items from crop budgets (such as animal purchases, feed and vitamins, veterinary services and medicines, housing and bedding, and breeding), there are a number of key components (such as interest on operating capital, taxes, insurance, office expenses, management, and labor) that are similar for both budgets. The following resource section provides information to help you find a wide range of useful livestock and crop budget samples or develop a budget design that works for you. Be sure to look at as many different budget samples as you can, so you can identify the components, lay-out, and level of detail that make the most sense for your operation.