Budget Analysis

1. Budget Analysis Ag Management Chapter 4

2. Objectives* • Know the factors of production • Understand what budgeting is and why it is important • Demonstrate knowledge of budgeting principles, limitations of budgeting and guidelines for successful budgeting • Know the steps in planning budgets • Identify the three types of budgets • Be able to develop and analyze an enterprise budget • Exhibit knowledge of partial budgeting

3. Planning a budget

4. 4 Factors of Budget Production • Capital • Labor • Land • Management • Must know the amount and value of each

5. 7 Questions Managers Must Answer • What are available factors of production? • What is the best way to use available factors? • What crop and/or livestock enterprises are possible? • What proportion of the land should be used for each crop or livestock activity considered? • What labor is necessary? • What capital is needed? • What management and production practices should be used?

6. What is Budgeting?

7. Budget • A plan for action by the business • Include projections of income and expenses for all or part of the business • Best format is a formal written plan

8. 6 Reasons for Budgeting • Helps you plan for the useful life of assets • An excellent device for organizing • Useful to estimate the amount of credit needed from lending agencies • Allows for experimentation with possible outcomes before resources are actually committed • Identifies cost and income items that might be otherwise overlooked • Lets you refine an organization

9. Types of Budgets • Enterprise • Projected cost and returns for one production process usually for one production period • Ex: projected cost and returns per acre for a crop or per head for livestock • Partial • Projected cost and returns associated with some change in the farm or ranch business • Ex: A farmer analyzing a possible change from custom harvest to owning his own equipment • Cash Flow • Estimates of cash inflows and outflows for an entire production period • Ex: a monthly summary of projected cash receipts and disbursements for an entire year

10. Limits of Budgeting • Time • Difficult to accurately predict prices and yields • Risk both production and financial can limit the effectiveness of budget reliability • Overlooking cost and overestimating profits • Overestimating production

11. 5 Guidelines to Make a Good Budget • Decide what you want to analyze with the budget • Decide whether to use enterprise or partial budgeting • Choose a time period for the budget. (Month, quarter or year) • Decide what data will be needed. • Decide how many alternatives will be evaluated or analyzed.

12. 5 Steps to Develop a Budget • Appraise the business and family goals and objectives • Inventory resources available for use in the farm or ranch operation. • Inventory should consider the available levels of land, labor, capital and management. • Select the physical data for inputs and outputs • Select the market prices for inputs and outputs • Calculate the expected cost and returns.

13. Enterprise Budget

14. Enterprise • Read p.4-4 to 4-10

15. Partial Budgeting

16. Partial Budgets • Projected cost and returns associated with some change in the business operation

17. When Partial Budgets are Useful • Expanding an enterprise • Alternative enterprises • Changing production practices • Buying new equipment/machinery

18. Effects of Changes Positive • Reduced Cost (RC) • Change will reduce or eliminate some cost. Any cost that does not change will not be included • Additional Returns (AR) • Change will cause additonal returns. Any returns that will not change will not be included • Positive Effects= RC +AR • Additional Costs (AC) • Change will cause additional cost to be incurred. • Reduced Returns (RR) • Change will eliminate or reduce some returns • Negative Effects = AC + RR Negative

19. Net Change in Income • (RC+AR)-(AC+RR)= Net Change in Income • An estimate of the net effect of making a proposed change • Positive= indicates a potential increase in income due to the change • Negative= indicated a potential reduction in income due to the change

20. 7 Componenets of a Partial Budget

21. Cash Flow Budgeting

22. Cash Flow Budgeting • Projects money flow, reciepts and expenditures for a specific time, usually one year • For farms and ranches cash flow budget is projected on a monthly basis

23. Advantages • Shows the operator where excess cash will be available and when cash deficits will occur • Provides for budgeted loans that are borrowed only for the periods through which they are required • Provides a technique for combining personal and farm or ranch financial needs for the next period • Allows comparison of cash flow projections with the cash flow summary to record actual performance against the advanced planning • Helps evaluate the relationship between short-term debt to repayment capacity • Lets the manager immediately see the cash position through the year

24. Disadvantages • Time must be devoted to collecting and projecting data • Projected prices are difficult to estimate • Borrowing rates may fluctuate • Family and business consumption of resources may vary • The entire cash flow projection plans need constant review and revision

25. Summary* • Cash flow planning is a tool the farm or ranch can use to analyze trends in the farm business • Allows a manager to analyze a net cash projection and borrowing requirements • Used to establish credit lines necessary to the farm business • Cash flows must be constantly evaluated and updated • Cash flows are only as good as the information used

26. Assignment • Complete Assignment Sheets 1-3 & Ch 3 and Ch 4 Review Sheets. • Due--