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Unformatted text preview: Partial Budgeting for Agricultural Businesse s College of Agricultural Sciences Agricultural Research and Cooperative Extension 2 Introduction Farm managers make choices every day. Some decisions have vital conse- quences for the farm business, while others are not as crucial. Some, such as purchasing milking equipment, occur infrequently. Others are made more often—choosing when to cull cows, for instance. The choices made today may have an immediate impact on the business, or they may take much longer to have an effect. These decisions may involve any facet of the farm business, including—but not limited to—production, personnel, or financing. The bottom line is that no matter the size or scope of any single decision, nearly all decisions can have important implications for the immediate and future success of the farm business. Because many decisions have such important impacts, farm managers need to analyze alternatives in a methodical fashion. Some alternatives are easily analyzed, and a decision can be made quickly. In other cases, farm managers must take more time to recognize and evaluate all potential effects of that decision. To do this, farm managers need a framework for analyzing the relevant trade-offs. This publication discusses partial budget- ing, a useful and easily implemented framework for such analysis. What Is Partial Budgeting? Partial budgeting is a planning and decision-making framework used to compare the costs and benefits of alternatives faced by a farm business. It focuses only on the changes in income and expenses that would result from implementing a specific alterna- tive. Thus, all aspects of farm profits that are unchanged by the decision can be safely ignored. In a nutshell, partial budgeting allows you to get a better handle on how a decision will affect the profitability of the enter- prise, and ultimately the profitability of the farm itself. 1 However, the value of a partial budget analysis is highly dependent upon the quality of the information used in the analysis. When and How to Use Partial Budgets The partial budget framework can be used to analyze a number of impor- tant farm decisions, including: ● adopting a new technology ● changing enterprises ● choosing to specialize ● hiring custom work ● leasing instead of buying machinery ● modifying production practices ● making capital improvements The structure of the analysis depends upon the nature of the decision being analyzed. For example, suppose you want to analyze the installation of a new milking parlor. It would be wise to perform a partial budget analysis on the milking enterprise by analyzing costs and returns on either a per-cow or per-hundredweight basis. On the other hand, a farmer choosing to purchase feed rather than grow it might want to see the effects on the whole farm, in terms of total income and costs. The partial budgeting framework is flexible enough to allow for these modifications....
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This note was uploaded on 08/08/2008 for the course AAE 320 taught by Professor Mitchell during the Spring '08 term at University of Wisconsin.
- Spring '08