Enterprise Budgeting

Enterprise Budgeting - Enterprise Budgeting AAE 320 Paul D....

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Unformatted text preview: Enterprise Budgeting AAE 320 Paul D. Mitchell Goal 1. Explain enterprise budgets: their purpose and use 2. Illustrate enterprise budgets: their different parts 3. Learn how to construct and use enterprise budgets Purpose of Enterprise Budgets To estimate projected costs, revenue, and net returns for a single enterprise to assess feasibility or profitability of current or potential enterprises Planning tool to test out new ideas and compare enterprises to identify best ones How much will I make on corn and soybeans? How profitable would wheat be? How do snap beans compare to soybeans? Purpose of Enterprise Budgets Estimate needs for inputs, facilities and storage, and marketing For your crops How much fertilizer, seed, chemicals do you order? Do you need new/bigger equipment? How much grain storage and marketing do need? For your livestock How much feed and bedding do you need? How much can you grow and how much buy? What about hired labor? Enterprise Budgets Usually "Enterprise" = a crop or livestock Corn, soybeans, wheat, alfalfa Dairy, feeder beef, cowcalf, hogs Specialty crops: sweet corn, trout, mink Conventional vs notill Grazing vs. confinement Enterprise Budgets Use a constant base unit Allows comparison across enterprises Crops = 1 acre Livestock = 1 head Each enterprise budget a "Lego" Snap "Legos" together to make your farm Compare wheat to corn and soybeans Compare farrowtofinish to finishing only Parts of Enterprise Budget Revenues Costs = Returns No formal structure as for balance sheet or income statement Cost categories used Machinery costs Variable/Operating Costs Fixed/Ownership/Overhead Costs Opportunity Costs Split into fixed and variable costs? Lump together into own category? Which ones included, which ones ignored Time line version: Planting Costs, Harvest Costs Examples Illustrate diversity in enterprise budgets All for Corn following Soybeans Iowa: "Crop Production Cost Budgets" www.extension.iastate.edu/agdm/crops/pdf/a120.pdf Illinois: "Crop Budgets" http://www.farmdoc.uiuc.edu/manage/newsletters/fefo08_05/fefo08_05.pdf Wisconsin: "Crop Enterprise Budget" http://www.cdp.wisc.edu/wk1/Corn%20after%20Soybeans%20Budget%20for%20Wisconsin.xls http://www.aae.wisc.edu/mitchell/Corn%20Soybeans%20Small%20Grains.xls Main point: No "right" way to do enterprise budget Enterprise Budgets and You Costs and returns to the same enterprise vary greatly among producers Lots of example enterprise budgets and returns projections available Do not accept someone else's enterprise budget for the cost and returns for growing corn, soybeans, dairy, beef, etc. as your costs You need to know your own costs, not someone else's estimate or the typical costs Minnesota Data for 1996 Corn Soybeans Source: Kent D. Olson and Heman D. Lohano. 1997 "Will the Real Cost of Production Please Stand Up?" Minnesota Agricultural Economists No. 687 http://www.extension.umn.edu/newsletters/ageconomist/components/ag237previous.html Illinois Data for 2006 Source: Gary Schnitkey "Crop Production Cost and Rotation Decisions" http://www.farmdoc.uiuc.edu/IFES/2007/presentations/Farm Economic Summit Schnitkey.pdf Enterprise Budgets Concept not hard: Revenues Costs = Returns Revenue easy to estimate: Price x Yield Variable input costs easy too If you already grow it, you should know For common crops and livestock, prices and typical yields available from many places If you already grow it, you should know Price x quantity use per acre Internet or call around for prices, typical use rates Enterprise Budgets Cost estimation difficult for machinery, buildings, facilities, equipment, etc. What does it cost to chisel plow a field? What is the annual cost of a dairy barn? What portion of tractor repair should be allocated to soybean production? Machinery Costs as an Example Machinery Cost Concepts Substantial component of costs (25%40%) Difficult to measure/estimate: user specific Variable Cost, UseRelated Cost, Operating Cost Fixed Cost, TimeRelated Cost, Overhead Cost Costs due to using the machinery Fuel, lube, maintenance, userelated repairs and labor Costs paid whether you use the machinery or not Interest, insurance, taxes, housing Depreciation: both a variable and fixed cost Machinery Costs Best method: keep accurate records of machinery use (hours) for each enterprise, expenses (fuel, repairs, maintenance), and current market value and use them to determine your Actual Machinery Costs for each enterprise Estimate Machinery Costs if you do not have records or you are looking at new options Economic Engineering Approach Adjust Custom Rates Most farmers don't do this Economic Engineering Approach Estimate machinery costs based on careful engineering data collection Use the machinery and carefully document Develop formulas to estimate fixed and variable machinery costs Market data and survey of used machinery buyers/sellers to develop formula for machine values as they age repairs, maintenance, fuel/lubrication speed, turning time, labor UW Resources Ron Shuler (UWEXBSE): Updated A3510 "Estimating Ag. Field Machinery Costs" Bulletin with worksheets Spreadsheet Official Aseries publication http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.pdf http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.xls Other Resources William Edwards (IA ExtensionEcon): "Estimating Farm Machinery Costs" Bulletin with worksheets www.extension.iastate.edu/Publications/PM710.pdf Lazarus and Selley (MN) "Farm Machinery Economic Cost Estimates for 200Y" Bulletin with fixed and variable costs for different machinery operations Lots more on machinery management http://www.apec.umn.edu/faculty/wlazarus/documents/mf2008.pdf Fixed Costs: depreciation, interest, taxes, insurance, housing Variable Costs: repairs and maintenance, fuel, lubrication, labor, (timeliness) Usually simple factors: Main Idea Fuel = 0.044 x PTO HP x hours of use x fuel price Lubrication = 0.15 x Fuel Cost Repairs and maintenance = % x new purchase price, with % adjusted for age or total use hours See the publications for more information For example: 1% of purchase price for cost of insurance and housing Machinery Cost Example What does it cost to run a chisel plow? Lazarus and Selley 2005 (23 ft): $6.81/ac Iowa 2005 Custom Rate $11.05/ac Wisconsin 2004 Custom Rate : $13.30/ac ($14.70/ac in WI 2007 Custom Rate) Indiana 2004 Custom Rate $11.78/ac South Dakota (East) Custom Rate: $10/ac Missouri 2003 Custom Rate $10/ac ($12.10/ac heavy soil) SW Minnesota 2001: $10.83/ac Custom rates not good estimates of typical farmer costs--usually too low Why not just use Custom Rates? Run over more acres, spread fixed costs Volume discounts or search for best price, so lower purchase price More efficient operators Family/friends not charge enough Discounted because not perfect timing Adjusting Custom Rates to Estimate your Cost Adjusting custom rates is an easy way to estimate typical machinery costs K. Dhuyvetter and T. Kastens at Kansas State University developed a formula using KFMA cost data and custom rates www.agmanager.info/farmmgt/machinery/MF2583.pdf UWEX bulletin and Spreadsheet "Fast and Simple Method to Estimate Machinery Costs" www.aae.wisc.edu/mitchell/Fast and Simple Method.pdf Scale Factor Calculation Scale Factor = 1.241 + (33.026/acres) Acres is annual acres operated Your Cost = Scale Factor x Custom Rate If you operate 1500 acres, then Scale Factor = 1.241 + (33.026/1500) = 1.263 Means your costs are 26.3% greater than the custom rate for a machinery operation 1.55 1.50 1.45 Scale Factor 1.40 1.35 1.30 1.25 1.20 0 500 1000 1500 2000 2500 Acres of Cropland 1 Scale Factor = % increase (as decimal) that your costs exceed the Custom Rate Acres 100 200 300 400 500 600 700 800 900 1000 1100 3000 1200 1300 1400 1500 1600 1700 1800 1900 2000 Scale Factor 1.571 1.406 1.351 1.324 1.307 1.296 1.288 1.282 1.278 1.274 1.271 1.269 1.266 1.265 1.263 1.262 1.260 1.259 1.258 1.258 Caveats Custom rates have wide ranges--call around, use Custom Rate Guides from Wisconsin and surrounding states Formula to adjust custom rates not perfect Use these machinery costs as a http://www.aae.wisc.edu/aae320/Budgets/WI_custom_rates_2007.pdf Need good records to estimate actual costs Guide to estimate typical costs Benchmark for comparison Method is not your actual costs for machinery Think Break #17 Estimate a typical cost to chisel plow a field for a farm of your size using the Fast and Simple Method a) Local custom rate is $16/ac b) You run 1800 acres of crop land Remember: Scale Factor = 1.241 + (33.026/acres) Typical Cost = Scale Factor x Custom Rate Enterprise Budget Example: Corn Budget Template to implement this "Fast and Simple Method" Work through an example Crop Budgets Special Cases Crops such as alfalfa and pasture Orchards, vineyards, etc.: do net present value analysis of the entire cost stream Storage, transportation, marketing, etc.: some crops large cost (vegetables, fruits) for these expenses, with different prices by sale date Create separate budgets for establishment and non establishment years, then include prorated cost of establishment on the nonestablishment year budget Establishment is $120/ac, nonestablishment is $25/ac for 3 more years, so add $120/4 = $30/ac Livestock Enterprise Budgets Many exist, many different ways used Unit: one cow, one hog, one ewe, etc., or one sowlitter, cowcalf, ewelambs, etc. Time period: hogs, flocks: more than one per year, others longer than one year, so adjust all costs to the same time period Machinery, facilities, and equipment: fixed and variable costs just as for crops Livestock Enterprise Budgets Multiple Outputs: milk, cull cows, calves Herd Replacement Adjust to one "cow unit" = 24,000 lbs milk, 0.39 cull cows, 0.52 calves, and 0.21 replacement heifers produced per year Include death loss and < 100% calving Raised: Reduce output (i.e., fewer heifers sold) Purchased: Include revenue from selling all heifers Net Cost of Replacement for Purchased Heifers 1) Depreciate (straightline) entire herd, and report no revenue from culls or cost of purchased replacements 2) Purchase cost/Useful life = Cost Culled Revenue/Useful life = Revenue, Both give same net replacement cost Livestock Enterprise Budgets Raised crop used for livestock feed Manure used as crop fertilizer Cost for livestock use should be its opportunity cost-- the cost if you had to buy the grain Credits crop with the full value of its production Cost to crop at its opportunity cost--the cost if you had to buy the equivalent fertilizer Credits livestock with full value of its production Charge all to one enterprise or split between? Delivery/Hauling costs for grain and manure BreakEven Yield and Price What yield or price do you need to break even on the enterprise? BreakEven Yield: At a given price, the yield needed to cover all costs BreakEven Yield = Total Cost/Output Price BreakEven Price: For a given average yield, the price needed to cover all costs BreakEven Price = Total Cost/Average Yield Allocating Overhead Costs Farms overhead costs must be allocated across all enterprises These costs should be declared on Schedule F, with depreciation tracked in farm records Enterprise budgets often miss these or similar costs Workshop costs, membership dues, insurance, legal fees, accounting costs, taxes, utilities, office costs, etc. Whole Farm Budget Developing budgeting system based on Schedule F that allocates ALL costs 3 year average of costs for each Schedule F category to "avoid" accrual adjustments Income Statement: better base to allocate costs from, but not all farms have Main idea: Allocate % of Schedule F cost to each enterprise, all costs allocated Example Budget Template (potatoes) Summary Defined & presented example Enterprise Budgets Details on machinery costs: Economic Engineering vs Custom Rates approach Example Budget Template Special Cases: Livestock, Perennial Crops Allocating Overhead: Schedule F and Whole Farm Budget Example Budget Template (Potatoes) Fixed Costs: depreciation, interest, taxes, insurance, housing Variable Costs: repairs and maintenance, fuel, lubrication, labor ...
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