Budgets are used to:
- Estimate profitability
- Project cash flows
- Provide a basis for obtaining financing
- Assist in business planning
To be most effective, a budget should be prepared with a specific objective in mind:
The budgets in the latest Tree Fruit Production Guide(also posted at our Penn State Extension website in an interactive format) were prepared to provide general information for a broad range of users and do not apply to individual orchards. They should be used, with appropriate modifications, as guides for preparing budgets for your individual situation.
Sample budgets should help you ensure that all costs and receipts are included in your budget. Costs are often difficult to estimate in budget preparation because they are numerous and variable. Therefore, you should think of budgets as a first approximation and then make appropriate adjustments using the "your estimate" column to add, delete, and adjust items to reflect your specific resource situation.
The sample budgets in the Tree Fruit Production Guidewere developed using a computerized budget generator. Input data reflect current production practices and prices. Major subheadings in the budgets are receipts, variable costs, fixed costs, and total specified costs. They are defined as follows:
- Receipts are the gross returns (price times quantity) from production. For tree fruit, receipts may be zero for several years. Because yields, grades, and prices are so variable, you should use representative values for your operation.
- Variable costs are costs that vary depending on the level of production for such inputs as fertilizer, herbicides, insecticides, fungicides, and labor. Other terms used to describe variable costs include cash costs (or expenses), direct costs, and out-of-pocket costs.
- Fixed costs are costs that do not vary by level of production and are incurred by virtue of owning assets such as machinery and land. Depreciation, insurance, and taxes are examples of fixed costs. Sometimes a management fee is included as a fixed cost. These costs are considered "fixed" because they generally remain the same within a production period and do not vary with the level of output. Indirect, noncash, and overhead costs are other terms used to describe fixed costs.
- Total specified costs are the sum of variable and fixed costs. A land charge of $200/acre has been included in the budgets, but this will vary greatly from location to location. If you own the land you could include your principal, interest payments, and property taxes as a fixed cost. If you lease the land, then the annual rental cost could be included as a variable cost.
When you subtract receipts from total specified costs you get an estimate of your return to risk and management. This is the estimated profit attributable to your acceptance of risk and your contribution of management expertise. Cash flows over the life of the investment should be accounted for when assessing the overall profitability of the enterprise.
Changing crop prices and input costs (in particular, fuel, pesticides, and fertilizer) make it particularly important for you to keep up with market trends and monitor your cost of production.
Sample budgets are a good starting point for developing your own estimates, but changing economic conditions and governmental policies can alter the marketplace and affect your profitability very quickly. Tree fruit production involves large initial investments and can be very risky; weather-related crop losses are common and crop prices can be highly variable. Use of individual crop insurance policies for apples, peaches, and pears or whole-farm risk management tools such as AGR-Lite can help you reduce these risks.
For a more detailed discussion of the use of budgets to improve crop decision making, see the farm management publication Enterprise Budgeting Analysis.