Enterprise Budget Analysis
Using Enterprise Budgets
Enterprise budgets represent estimates of receipts (income), costs, and profits associated with the production of agricultural products. The information contained in the enterprise budgets can be used by agricultural producers, extension specialists, financial institutions, governmental agencies, and other advisers making decisions in the food and fiber industry. Budgets are used to:
- itemize the receipts (income) received for an enterprise
- list the inputs and production practices required by an enterprise
- evaluate the efficiency of farm enterprises
- estimate benefits and costs for major changes in production practices
- provide the basis for a total farm plan
- support applications for credit
- inform nonfarmers of the costs incurred in producing food and fiber crops
Enterprise budgets should be prepared with specific objectives in mind. The sample budgets in this and other Agricultural Alternatives publications should help ensure that you include all costs and receipts in your own budget. Receipts and costs often are difficult to estimate in budget preparation because they are numerous and variable. Therefore, you should think of the sample budgets as a first approximation and then make appropriate adjustments using the column “Your Estimate” to add, delete, and adjust items that reflect your specific production situation. The example dairy and corn budget formats in this publication outline typical livestock or crop budgets. These examples, unlike those for specific enterprises in this series, omit the estimated amounts for individual entries.
Enterprise budgets should contain receipts for every product and by-product of the enterprise. Prices used should reflect market values and productivity of enterprise resources (land, labor, equipment, etc.).
Enterprise budgets contain several cost components. Determining the costs of production practices can be difficult. Individuals often disagree over which costs to include and how they should be measured. Understandably, these differences arise because production costs are unique to each resource situation. An important financial distinction is the concept of variable and fixed costs.
- Variable costs are those expenses that vary with output within a production period. Examples include expenses for feed, marketing, herd health, breeding, seed, fertilizer, chemicals, fuel, repairs, and hourly or seasonal labor. Other terms used to describe variable costs include cash costs (or expenses), direct costs, and out-of-pocket costs.
- Fixed costs do not vary with the level of output. They include depreciation, taxes, interest on investment, land charges, salaried labor, and insurance. Sometimes a management fee also is included as a fixed cost. Indirect, noncash, and overhead costs are other terms used to describe fixed costs.
- Total costs are variable and fixed costs added together. While an enterprise should earn a profit above total costs, this is not always possible. Income received often is less than total production costs. Should an enterprise be continued under these circumstances? The answer may be yes if (1) returns are above variable costs and (2) this is a short-term condition. If fixed costs are not covered in the long run, however, reinvestment in capital items (such as tractors, implements, buildings, and equipment) cannot be made and existing capital stock eventually is depleted.
Enterprise budgets are useful for performing breakeven analysis for prices and yields. The breakeven price is computed as follows:
Breakeven price = anticipated total costs ÷ anticipated yield
This is the minimum price per unit required to cover all costs at the anticipated yield. The breakeven yield is computed as follows:
Breakeven yield = anticipated total costs ÷ anticipated price
This is the minimum yield required to cover all costs at the anticipated price per unit.
Breakeven analysis is a useful farm management tool because it allows calculation of various combinations of price and yield that will cover anticipated costs. Breakeven analysis can also be used to calculate the breakeven price or yield required to cover variable costs (short-term production decisions). If anticipated receipts are greater than anticipated variable costs, you should continue the enterprise.
Any loss would be equal to some amount between the difference in total costs (variable costs plus fixed costs) and variable costs. If anticipated receipts are less than variable costs, losses would be minimized by not continuing the enterprise. In this situation, losses would be limited to the amount of fixed costs that you would have to absorb.
Enterprise Planning and Financial Management
Enterprise budgets also are very useful in selecting the mix of enterprises which will be undertaken on the farm. They can be used to provide an estimate of overall profitability and resource requirements (land, machinery, labor). Budgets also can be used to estimate borrowing needs and cash flow for the farming operation. When borrowing money to finance operations, you can show that you have carefully evaluated potential earnings and credit needs with a good set of enterprise budgets.
Penn State Cooperative Extension, like many state extension services, makes production cost and return estimates (in budget format) for many crop and livestock enterprises.
Budgets are provided in the following production guides and handbooks:
- Penn State Agronomy Guide
- Beef Cow Management
- The Penn State Farm Management Handbook
- Pennsylvania Forage Handbook
- Small Fruit Production and Pest Management Guide
- Tree Fruit Production Guide
Sample Budget Worksheets
Please see pages 3-4 of the .pdf version of this publication. These may be printed and filled in as a starting point for your own enterprise budget.
Prepared by George L. Greaser, senior research associate for agricultural economics, and Jayson K. Harper, assistant professor of agricultural economics.
This publication was developed by the Small-scale and Part-time Farming Project at Penn State with support from the U.S. Department of Agriculture–Extension Service.