For each enterprise, producers should develop a separate budget
The time we have been anticipating is finally here. It’s a new year and 2020 is in our rearview. I think we can all agree 2020 is one for the record books. Which brings up another topic on everyone’s mind for 2021. What will the year hold and how do I plan accordingly?
You probably begin each year by looking at your previous records, budgets and plans. This year, pay extra attention to past trends and consider what-if scenarios. It may also be useful to include enterprise budgeting.
An enterprise budget is an estimate of costs and returns to produce a product or enterprise.
If you raise cattle and grow crops, then you develop an enterprise budget for each. For example, an enterprise would be an acre of corn, an acre of wheat or a cow producing calves. Each enterprise requires different resources. This type of budget will help you evaluate your options to ensure you are using resources in the best possible way when making farm management decisions.
An enterprise budget should include all estimated income and expenses for each enterprise. This includes all sources of income, variable or operating costs, and fixed costs in order to estimate profitability.
Begin by estimating your income or total receipts.
For example, an acre of corn that yields 150 bushels at $4.80 would be $720 total receipts. Next, calculate your variable costs. These could include fuel, seed, fertilizer, chemical, labor and interest. Then evaluate your fixed costs, which could include taxes, interest and insurance. Depreciation is also a fixed cost.
You will want to consider depreciation with machinery, grain bins and other facilities. Your break-even point is when total receipts equal total costs. Knowing your break-even point is important to determine which enterprise is most profitable. You will want to keep this updated as things change with your operation, whether that is new machinery purchases or input cost modifications.
Finally, you will want to determine net receipts, also known as your profit. The net receipts are calculated by subtracting total costs from total income.
You may ask why put all this effort into budgeting for each enterprise? The answer is simple. To maximize profits. When you know how to allocate your resources and know the estimated profitability from each enterprise, you are in control and can make better decisions. The key is that an enterprise budget allows you to identify profitability as it relates to each product versus a whole farm budget. It provides more finite detail.
For example, you raise livestock and grow crops. You want to consider expansion. Your enterprise budget will show which product is most profitable and help you decide if expansion is the right thing to do at the time. You will also know how to allocate resources to the most profitable piece of your business. A bonus is that your lender will also be able to see the detail per enterprise helping them determine the profitability and risk involved with expansion.
Remember, enterprise budgets are estimates. Therefore, you want to capture the best information available. Historical data can help you form accurate estimates. Reviewing your previous years’ plans and doing an internet search are helpful. You may also consider reaching out to your local Extension.
If anything, 2020 taught us that we should be prepared for the unimaginable. Enterprise budgets may not solve pandemics and supply chain issues, but they can help you adjust resources and make decisions when the unexpected happens. Make 2021 your best year yet.
Landon Snook is the Farm Credit Services Financial Vice Presdient, Joplin