Farm Planning and Budgeting Techniques Flashcards
Farm Planning: Definition
A systematic and comprehensive framework for exploring ways of increasing farm efficiency and profitability
How many times in a farmers life does it happen? Major re-planning
Give examples
–Perhaps only 2-3 times in farmer’s life-time
–Examples:
*Buy more land
*Give up job and return to farm full-time
*Debt problem
–Sometimes uses/requires “zero-budgeting” (e.g. starting a new business)
*E.g. “greenfield dairy”
–Where debt problem: early problem identification & appropriate action very important
*Requires careful assessment of current performance
In most cases what does farm planning for establish businesses involve?
In most cases farm planning for established businesses involves marginal (incremental) changes to the existing system
List 4 ways to increase profits:
1.Increase Gross Margin (GM) from existing enterprise
–Improve efficiency (yield, SR, use of inputs, marketing etc)
2.Substitute higher GM enterprises for lower GM enterprises
–E.g. Increase dairy, decrease beef
3.Cut back fixed costs
–Simplify farm system
–But may mean reduced gross margin
4.Introduce new element to the business e.g.
–Processing, retail, livery, contracting, horticulture, poultry, B&B etc etc
What are constraints limits possibilities to the business? (4)
*Physiological limits
*Diminishing returns
*Managerial ability e.g.
–Limited experience of new enterprise
–Too many enterprises can stretch management to limit
*Resource levels – capital, land, buildings, etc
What is Planning vs Budgeting?
*Planning v’s budgeting
–Planning is about identifying ideas for future farm development
–Budgeting is about evaluating those idea
How is budgeting calculated?
Budgeting = a calculated assessment of the impact of a plan on annual profit
–Tests alternatives on paper
–Does each specific plan generate more or less profit
What can budgets also be concerned with?
Budgets can also be concerned with: cash flow and risk
–Cash flow budgets should also accompany profit budgets
–Use of sensitivity analysis to assess risk
What can budgeting be assisted by?
Can be assisted by computers especially spreadsheet
What are the 3 reasons we prepare budgets?
*Viability:
–Will the plan improve the viability of the farm in the longer term?
–Questions about longer-term viability often stimulus for farm planning
*Feasibility:
–Are resources adequate to support the plan?
–What cash flow will the course of action generate?
–Can loans be financed satisfactorily?
*Worthwhileness:
–Is the plan financially worthwhile?
* Return on capital/profitability
What are the key budgeting methods that aid farm planning? (2)
1- Profitability Budgets
2-Cash Flow Budgets
What do profitability budget asses on?
Worthwhileness of a plan
Under profitability budgets what are the 3 budgets?
1.Enterprise Budgets
2.Partial Budgets
3.Complete farm budgeting
What does the enterprise budgets evaluate?
*Evaluates: revenues and expenses of single enterprise (per head or per ha)
*Often form the building blocks of other budgets
Whats the story with partial budgets?
*Minor/incremental changes to the business
*Evaluates expected changein revenues and expenses due to the change
*Probably most widely used farm budgeting technique
