Budgeting and Planning for the Year Ahead
It is that time of year again when the plans for the coming season are being put into place and finalized, ready for the new season to begin. This is also a time to look at the year that passed, as well as the year to come with regards to past and expected performance of the farm as well as the individual enterprises.
When evaluating enterprises, and or evaluating the addition of an enterprise to your business, an enterprise budget is a useful tool to be able to analyze its passed and prospective financial impact on your farm. During the drafting and development of these enterprise budgets, it is important to include the opportunity cost to, or from the other enterprises in your business. For example, if in your farming business you have a corn enterprise and a feedlot, and you use your corn and silage from your corn enterprise to feed your cattle. When you calculate the enterprise's budgets you would use the current market price for the corn enterprise's income and the current market price of the corn in your feedlot's expenses. In doing so you will have accounted for the opportunity cost of your corn enterprise (what the corn and silage would have made for you had you sold it), and you will be able to see the feedlots true profitability (it will show you if you made a profit if you bought the corn in).
Enterprise budgets that include this opportunity cost, will be able to show you if both enterprises are profitable or if one is subsidizing the other, in which case you could identify the shortcomings or inefficiencies in the subsidized enterprise. If for example, in your corn enterprise you determine that you are operating at a "loss" at the current market price, then this would suggest that the cost of your corn to the feedlot enterprise is higher than if you bought the corn in from outside (i.e. it reduces your feedlots profits), in which case the feedlot would be subsidizing the corn enterprise. To raise total farm profit's you could then either look at ways to make the corn enterprise more profitable or to buy in the corn for your feedlot and change the planting of the corn to a more suitable and profitable field crop and this would raise your total farm's profits.
When performing a whole farm cash flow budget however, the opportunity cost is excluded as this is not an actual cost to your business. In other words, you are not going to pay yourself for the corn and silage but will rather use the corn and silage to fatten the animals and realize your profits once these animals are sold. The cost to the farm of the feeding operation then would only include the production costs of the corn and not the market value of the corn. Budgeting either way is an important component of your financial success and your ability to thrive in difficult financial times, as this is the starting point in not only determining what your financial requirements will be in the coming season, but also how your debt should be structured to best suit your farm's production and repayment capacity.
