A survey conducted last year by the Extension Risk Management Education Regional Centers and the Center for Farm Financial Management at the University of Minnesota indicates that only 8 percent of producers are well-equipped, in terms of business-management skills, to navigate their business through a period of financial stress.
However, the survey also found that about 75 percent of producers are moderately well-equipped and could do a better job with the proper assistance and tools.
Enterprise budgets are one tool that can help you transform yourself from an average manager to an elite student of your business. Constructing a series of enterprise budgets may sound complicated, but this instrument allows you to wrap your arms around the big financial picture of your operation by providing excellent snapshots of what is going on within individual areas.
Given the financial challenges that most dairies faced this past year, now is a good time to get more details on where your potential profits and losses are likely to occur, notes Steve Zimmerman, senior tax consultant at GreenStone Farm Credit Services.
Here’s how to get started with enterprise budgets.
1. Gather your records.
When creating enterprise budgets for the first time, begin with financial and production records for your entire farm. Pull several years of data to note trends.
You’ll need to know how much milk your cows produced, how many calves were born, growth rates, death losses, cull rate, crop yields and so on for the production side. Then, gather historical expenses for your operation, like taxes, labor, feed, fuel, equipment and more. You’ll also need gross returns, net returns and government payments, if applicable. Keep in mind, the more accurate your records, the more useful the enterprise budget will be.
“Without good, historical production and financial records, developing enterprise budgets can be time-consuming and frustrating,” says Jackie Smith, Texas A&M University extension economist.
If you are thinking of planting a new crop or starting a specialty production endeavor, you’ll need information for these, too. It’s likely you won’t have these data in your files, so work with your local extension office and your management team to estimate these values.
2. Break out your enterprises.
Next, decide into how many pieces to divide your farm. Look at it like this: An enterprise, or profit center, is a distinct part of your farm business that can be analyzed separately.
If you raise your own calves, milk cows, feed out dairy steers, grow your own crops, harvest crops and/or offer custom services to neighbors, each area would be considered its own enterprise. Or, you can analyze any of these segments as a potential enterprise if they are not currently part of your operation. You can break these areas down even further — for instance, wet calves vs. yearling heifers — if you want to get more sophisticated.
Budgets should be tailored to fit individual situations due to differences in experience levels, management abilities and willingness to assume risk, say experts at Oklahoma State University. In other words, do what is most comfortable to you. These budgets can always be refined as you become more familiar with enterprise analysis.
3. Input your data.
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?
According to farm-management experts at Texas A&M University, when done correctly, enterprise budgets can help you manage your operation better by identifying the following:
- Which enterprise or enterprises contributes the highest return to fixed resources.
- Amount of labor needed.
- Amount and types of equipment needed for your combination of enterprises.
- How to best use your equipment on available land and facilities.
- Amount of operating capital needed.
- Production practices to use.
- Areas where you may cut cost or become more efficient.
- Breakeven prices and yields.
- Level of risk exposure within enterprises.
This information can then be used to develop marketing strategies, obtain financing, get help with cash-flow estimations, and make other key farm business decisions.