Now you’re ready to plug numbers into your budget.
The information can be organized in a number of ways, but enterprise budgets typically include sections for gross income, variable cost, fixed cost and net income.
Using the data you’ve gathered, assign values for each cost and income area for every enterprise you identified in the previous step. Remember, you’re using historical data, which may or may not reflect your current situation. So, base your numbers on what you think will happen for the planning period, given these past experiences. However, avoid being too optimistic or pessimistic about these figures, says Dale Johnson, extension farm management specialist at the University of Maryland.
When it comes to setting costs, some values will be easier to determine than others, but do your best to be accurate. Do not overlook or distort costs and income. Keep in mind that some costs that are difficult to allocate to a specific enterprise, like telephone bills or accounting services, may be omitted from enterprise budgets, but are still part of the whole farm budget.
4. Analyze the outcome.
Finally, to complete the exercise, evaluate your results.
Subtract the total anticipated operating cost for an enterprise from the anticipated returns. If returns above operating cost are positive, you can logically assume that the enterprise is potentially profitable, or at least economically rational. If the opposite is true, then you can assume that the enterprise is not able to cover even variable costs. You have some big decisions to make as to whether that enterprise should continue to be part of your dairy.
At the end of the day, you may not be able to make perfect decisions, but by developing and using enterprise budgets, you can improve the quality of information available to you.
What is an enterprise budget?
An enterprise budget is the basic building block of a farm plan. It is an estimate of the cost and returns associated with the production of a product or products that is referred to as an enterprise. It is a physical and financial plan for raising and selling a particular crop or livestock commodity, explains Richard Carkner, farm management professor emeritus at Washington State University.
These budgets are physical because they indicate the type and quantity of production inputs and outputs per unit. They are financial because they assign a cost to all of the inputs used to create whatever the enterprise produces.
Most enterprise budgets are for one year, or a representative one-year period if the enterprise’s production spans more than 12 months.
Why should you create enterprise budgets?