Whole Farm Budgeting Flashcards
This will only be examinable from a theory point of view
Whole Farm Budget:
looks at the entire farm budget
WFB includes all expected revenues and expenses for all the farm’s enterprise
used where a decision will involve a major change in farm organisation and structure (affecting most or all the farm enterprises and resource
often about identifying new ideas for the farm (business strategy)
estimates total expected farm profit
Partial Budget:
Only the extras are looked at
PB examines revenues and costs affected by a marginal change in the farm business
only examines a relatively minor change
testing a specific plan
expected change in profit
What are the 7 Questions for whole farm planning?
1.What do you want to accomplish? (Goals)
2.What do you have to work with? (Resources)
3.What has been done? (Analysis of past performance)
4.What might be done? (Alternative plans)
5.What will be done? (Decision)
6.How will it be done? (Implementation)
7.Is it working? (Monitoring/control)
What is the WFP usually associated with?
–Usually associated with significant farm restructuring/adjustment
–Contrast with more incremental change evaluated with partial budget
How long is a Whole Farm Planning Usually?
What does a WFP project?
When is it typically used?
Who should it involve?
*Usually long term planning (5-10 years or more)
*Projects total farm profit (WFB) as well as cash flow (cash flow budget)
*Typically used when major re-planning of the farm business required
–Major expansion/development
-Purchasing/inheriting a new farm
–Debt crisis
–Injury/illness
*Must involve the farmer (if being prepared by consultant/advisor)
Risk assessment and attitude to risk
What are the key objectives of WFP? MCQ
–Profit, growth, hand over to next generation, reduce risk, lifestyle (e.g. work load, leisure time, family time), other (e.g. care for environment)
–And are they realistic in the context of the available resources?
–Usually need adequate profit before other objectives possible
What are the 7 steps of whole farm planning ? MCQ
1- What are the objectives
2- Internal analysis of the farm
3-External Analysis
4- Identification of possible plans (development options)
5- Detail of each plan (the physical plan)
6- Financial Budget for each plan (the financial plan)
7- Select and implement plan on basis projected
“Ad Hoc” Whole Farm Planning What is it?
A standard tool used by farm advisors for analysing/evaluating farm development plans
*It is ad-hoc in the sense that:
–Such budgets tend to be prepared on an irregular basis (i.e. when a farmer is conducting significant re-planning of their business)
–In many cases farm records are quite poor (no enterprise level gross margins accounts)
- Necessary to piece together budget using “patchy” or aggregate information (e.g. tax records on sales and expenditure)
- May use farm management standards to fill in gaps in data
- Typically will try to estimate GMs from available information
In a WFB what is the relevant technical information included?
- Crop yields, lambing percentages, milk yields, replacement rates, etc.
- These figures needed to be verified as advisor/consultant can’t be expected to be expert in every enterprise
–Highlight figures that need to be monitored closely (e.g. milk production by month)
What are advantages of Ad Hoc Budgeting? MCQ
*Provides a useful statement of the projected profit of the farm business
*If well prepared, budget can provide detailed information on expected technical and financial performance on the farm enterprises
*Particularly useful where actual performance (technical and financial) is monitored against budget
*Process of preparing the budget is useful in terms of identifying current strengths and weaknesses
*Should encourage farmer to think strategically about the future
*Supports application for bank finance (e.g. Bank development loan)
What are limitations of Ad Hoc Budgeting?
*Time consuming to prepare
–Especially when projections are being prepared for a development plan that runs over several years (normal situation)
*Absence of farm records often makes verification of performance data difficult
*Misleading if carelessly prepared or if standard data used that is not representative of actual performance
*May neglect to assess feasibility of plan in context of available resources
*Sometimes prepared by financial advisor or accountant with minimal direct input from the farmer/decision maker
–Narrow focus on gaining bank finance rather than use as a management too
Example of Whole Farm Budgeting (3)
–Budget for base plan and small number of alternatives
–Usually exclude notional charges
–Sensitivity analysis important to check reliability of budget results
*Sometimes use partial budgets to complement WFB e.g. to examine the worthwhileness of minor changes to the main plan
Why are farm budgets useful?
Farm budgeting is useful way of testing alternatives on paper
But there are lots of limitations - often ignores the law of diminishing returns
