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Budgeting

Budgeting. Gain control of your money. Objectives. Be familiar with the types and purposes of farm budgets. Construct and analyze enterprise budgets, whole farm budgets, and cash flow budgets for management purposes. Be able to explain and justify estimates for production and expenses.

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Budgeting

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  1. Budgeting Gain control of your money.

  2. Objectives • Be familiar with the types and purposes of farm budgets. • Construct and analyze enterprise budgets, whole farm budgets, and cash flow budgets for management purposes. • Be able to explain and justify estimates for production and expenses. • Be able to identify potential cash flow problems. • Maintain and utilize a household budget.

  3. Enterprise Budget • Estimate the revenue, expenses, and profit for a single enterprise for a year or less. • Enterprise: individual crop or livestock • i.e. winter wheat, grain corn, cow/calf, backgrounding • Allows you to “try it out” before committing resources to the enterprise. • Part of strategic management • Tests feasibility • Allows you to pick most profitable enterprises • Gives you a base on which to compare alternative enterprises.

  4. Budgeting Fundamentals • Revenue – includes cash and noncash revenue (include price/yield). • Operating (Variable) Expenses – includes costs that are only incurred if crop is produced. • Fuel and Lubricants, Machinery Repairs, Labor: • Total Fuel Expense ÷ Crop Acres • Fuel Expense/Acre x Number of Acres x Number of Operations • Fuel Expense/Hour x Hours for Machine Operations • Interest – interest on borrowed capital or opportunity cost

  5. Budgeting Fundamentals • Ownership (Fixed) Expenses – includes costs that will be incurred even if no crop is produced. • Machinery Depreciation - average annual depreciation per acre • Machinery Interest = [() x Interest Rate] ÷ Acres • Machinery Taxes & Insurance • Land Charge: • Cost to rent similar land • Net cost of crop share • If owned, land value/acre x interest rate

  6. Budgeting Considerations • Budget units and time period • Make adjustments for: • Double cropping • Storage costs • Establishment costs • Breeding herd replacements

  7. Analyzing Enterprise Budgets • Cost of Production = • Break-even Yield = • Break-even Price = • Sensitivity Analysis:

  8. To Solve for Cost of Production:

  9. To Solve for Break-even Yield:

  10. To Solve for Break-even Price:

  11. Price Sensitivity Analysis

  12. Yield Sensitivity Analysis

  13. Whole Farm Budget

  14. Whole Farm Budget • Goal is to find the optimal combination of enterprises based on: • Maximizing profit • Resources • Moving towards long term goals • Crop rotations • Take your management to the next level: use linear programming in Microsoft Excel to determine profit maximizing enterprise combination for your resources.

  15. Cash Flow Budgeting

  16. Cash Flow Budgeting • Cash flow budgets estimate cash inflows and outflows for the crop year. • Inflows – sales, new loans, crop payments, sale of capital assets • Outflows – expenses, loan repayment, taxes • Critical for strategic and tactical management. • Anticipates cash shortages • Analyzes ability to repay loans • Determine manageable amounts for borrowed capital • Cash flow is concerned with timing.

  17. Personal Budgeting

  18. Personal Budgeting Fundamentals • You need to keep your personal finances separate from the business. • Elevates false sense of security • Manage personal lifestyle • Preparation for retirement, college, life events • Monthly budgets should consider all income, expenses, and savings. • 0-based budget • Variable income? Budget off your lowest average income

  19. Personal Budget Categories • Income: • Family farm expenses (salary) • Spouse’s income • Non-farm income • Expenses: • Tithe & Charitable Giving (10%) • Food (5-10%) • Housing (25-30%) • Utilities (5-10%) • Transportation (10-15%) • Clothing (2-7%) • Savings (5-10%) • Medical (5-10%) • Personal (5-10%) • Recreation (5-10%)

  20. Personal Budget Reminders • Developing personal budgets takes time and patience. • It will take at least 3 months to have an accurate budget • Personal budgets should be developed for each month. • Revenue and expenses should reflect time of year, holidays, traveling, birthdays, and other important events • Update your budget with actual numbers several times a month. • This will help you stay on track and meet goals

  21. Homework • Gather information for your enterprise budgets, cash flow budget, and whole farm budget. • Complete your enterprise budgets, cash flow budget, and whole farm budget. • Calculate your break-even price, break-even yield, and cost of production. • Complete your personal budget for this month.

  22. One Minute Takeaway • Take a minute to write down one or two ideas or takeaways from this lesson.

  23. Sieverkropp Consulting LLC. Contact: Elizabeth Sieverkropp esieverkropp@gmail.com (509) 398-6858 Website: www.sieverkroppconsulting.com Training Program Homepage: www.sieverkroppconsulting.com/fsa-borrower-training-program-homepage

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