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Farm Management

Farm Management. Chapter 12 Whole-Farm Planning. Chapter Outline. What is a Whole-Farm Plan? The Planning Procedure Example of Whole-Farm Planning Linear Programming Other Issues. Business Plans. What is a business plan? Why should I create a business plan?

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Farm Management

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  1. Farm Management Chapter 12 Whole-Farm Planning

  2. Chapter Outline • What is a Whole-Farm Plan? • The Planning Procedure • Example of Whole-Farm Planning • Linear Programming • Other Issues

  3. Business Plans • What is a business plan? • Why should I create a business plan? • What are the sections of a business plan? http://www.paragonventures.com/business%20plan%20d8dgvd8.gif

  4. What is a Business Plan? • A business plan is a document which highlights (for the given year): • A plan of how the company will be run • The goals of the company • The money required to meet those goals • The strategy employed to meet those goals (including marketing)

  5. Why Should I Create a Business Plan? • A business plan forces a business to assess the market place • It forces a business to identify a clear marketing strategy • It also serves as a benchmark which the companies performance can be measured against.

  6. The Sections of a Business Plan • There are seven essential sections of a business plan. These are the: • Executive Summary • Business Description • Define Your Market • Identify and Analyse Your Competition • Design and Development Plan • Operations and Management Plan • Financial Statements

  7. What is a Whole-Farm Plan? • An outline the type and volume of • Production • The resources needed to do it. • The expected costs and returns • for each part of the plan • These organized into a detailed projection, • the result is a whole-farm budget.

  8. Whole farm Budget • A whole-farm budget includes all the enterprises to be carried out on the farm, and projects total income and expenses instead of income and expenses per unit (enterprise budget) or the net changes in income and expenses as a result of a certain management change (partial budget).

  9. The Planning Procedure • Review goals and specify objectives • Inventory resources • Identify enterprises and technical coefficients • Estimate the gross margin per unit • Choose the enterprise combination • Prepare a whole-farm budget

  10. Set the goals • The best plan cannot be developed until the manager knows what that plan must try to do • what goals should the plan try to attain. Certain goals may restrict the mix of alternatives that can be considered or require that certain enterprises be included in the plan while trying to maximize or minimize some overall goal.

  11. Figure 12-1Procedure for developing a whole-farm plan

  12. Resources • Land: total number of acres, types of land, fertility levels, climate, potential pests, tenure arrangements and leases, etc • Buildings: number, type, condition • Labor: quantity and quality • Machinery: number, size, and capacity • Capital: short-run and long-run availability • Management: age, experience, and past performance • Other resources: markets, quotas, specialized inputs

  13. What should be Included? • The type and quality of resources available including land, labor, buildings, equipment, livestock, and any special entitlements or restrictions

  14. Technical Coefficients • how much of a resource is required • to produce one unit of the enterprise. • Technical coefficients are important • in determining the maximum possible size • of enterprises and the final enterprise • combination.

  15. Estimating Gross Margin Enterprise budgets provide estimates of gross margin, or returns above variable costs.

  16. Fixed Coat is not included • Since fixed costs will not vary with changes in the combination of enterprises, the combination that produces the highest gross margin (gross income minus variable costs) will also produce the highest profit (gross income minus all costs). However, for a whole farm budget fixed costs are needed to project total profit or net income as well as total cash outflows.

  17. Example of Whole-Farm Planning The objective of the manager is to choose the combination of crop and livestock enterprises that will maximize total gross margin.

  18. Table 12-1Resource Inventory for Example Farm

  19. Table 12-2Potential Enterprises and Resource Requirements

  20. Table 12-3Estimating Gross Margin

  21. Figure 12-2Constructing the whole-farm budget

  22. Table 12-4Example of a whole-farm budget

  23. Linear Programming Linear Programming (LP) is a mathematical procedure that uses a systematic technique to find the most profitable combination of enterprises. Linear programming models have linear objective functions that are maximized (or minimized) subject to the resource restrictions.

  24. Table 12-5Linear Programming Tableau for the Farm Planning Example

  25. Table 12-6Linear Programming Solution to the Farm Planning Example

  26. Shadow Prices and Reduced Costs Linear programming routines provide other useful information in addition to the optimal enterprise combination. Shadow prices tell the manager how much the objective function would increase if one more unit of a limited resource were available. A shadow price is the marginal value product of the resource. Reduced costs tell the manager how much the objective function would decrease if the manager chose to produce one unit of an enterprise that was not selected.

  27. Other Issues • Sensitivity analysis: analyzing how changes in key assumptions affects income and cost projections • Liquidity analysis: analyzing the ability of the business to meet cash flow obligations • Long-run versus short-run budgeting

  28. Sensitivity Analysis • Any value that is highly variable and has a large impact on profit should be analyzed. Common values included in sensitivity analysis are selling prices, crop yields, livestock production rates, and prices of major inputs.

  29. Long-Run Budgeting • Use average or long-run prices • Use average or long-run yields • Ignore carryover inventories • Ignore borrowing and repayment of operating loans, but incorporate interest costs if significant • Assume enough capital investment each year to maintain depreciable assets • Assume constant size of the operation

  30. Table 12-7Example of Liquidity Analysisfor a Whole-Farm Budget

  31. the difference between analyzing profitability and analyzing liquidity • Both include cash income and cash expenses. Profitability can be measured by net income, which also includes noncash income such as inventory changes and products consumed at home, and noncash expenses, such as depreciation. Net cash flow does not include noncash items, but does include loan funds received and repaid, the purchase and sale of capital assets, and nonfarm cash income or withdrawals.

  32. Summary Whole-farm planning and budgeting analyze the combined profitability of all enterprises in the farming operation. Linear programming can be used to select the optimal enterprise combination.

  33. Appendix Graphical Example of Linear Programming

  34. Table 12-8Information for Linear Programming Example

  35. Figure 12-3Graphical illustration of resource restrictions in a linear programming problem

  36. Figure 12-4Graphical solution for finding the profit-maximizing plan using linear programming

  37. All corn = All Soybean = Mixed = 800 Soybeans 800 Corn

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