Budgeting

Gain control of your money.

Be familiar with the types and purposes of farm budgets. Construct and analyze enterprise budgets, whole farm budgets,

and cash flow budgets for management purposes. Be able to explain and justify estimates for production and

expenses. Be able to identify potential cash flow problems. Maintain and utilize a household budget.

Objectives

Estimate the revenue, expenses, and profit for a single

enterprise for a year or less. Enterprise: individual crop or livestock

i.e. winter wheat, grain corn, cow/calf, backgrounding Allows you to “try it out” before committing resources to the

enterprise. Part of strategic management Tests feasibility Allows you to pick most profitable enterprises Gives you a base on which to compare alternative enterprises.

Enterprise Budget

Revenue – includes cash and noncash revenue (include

price/yield). Operating (Variable) Expenses – includes costs that are only

incurred if crop is produced. Fuel and Lubricants, Machinery Repairs, Labor:

Total Fuel Expense ÷ Crop Acres Fuel Expense/Acre x Number of Acres x Number of Operations Fuel Expense/Hour x Hours for Machine Operations

Interest – interest on borrowed capital or opportunity cost

Budgeting Fundamentals

Budgeting Fundamentals

Ownership (Fixed) Expenses – includes costs that will be incurred even if no crop is produced. Machinery Depreciation - average annual depreciation per acre Machinery Interest = [() x Interest Rate] ÷ Acres Machinery Taxes & Insurance Land Charge:

Cost to rent similar land Net cost of crop share If owned, land value/acre x interest rate

Budget units and time period

Make adjustments for: Double cropping Storage costs Establishment costs Breeding herd replacements

Budgeting Considerations

Quantity Price or Value or Total ValuePer Acre Unit Cost/Unit Cost/Acre or Cost

Gross RevenueWheat Grain 100.00 bu. 7.49$ 749.00$ 374,500.00$

Government PaymentsTotal Gross Revenue For Wheat Grain 749.00$ 374,500.00$

Operating ExpenseSeed 90.00 lb. 0.29$ 26.10$ 13,050.00$ Fertilizer 55.00 lb. 0.33$ 18.15$ 9,075.00$ Pesticides 30.00 lb. 0.29$ 8.70$ 4,350.00$ Fuel, oil, lubrication 1.00 acre 6.00$ 6.00$ 3,000.00$ Machinery Repairs 1.00 acre 13.00$ 13.00$ 6,500.00$ Labor 2.00 hr. 20.00$ 40.00$ 20,000.00$ Interest 50.40 $ 0.09$ 4.54$ 2,268.00$

Total Operating Expenses per Acre 116.49$ 58,243.00$

Net Returns Above Operating Expenses 632.51$ 316,257.00$

Cash Ownership ExpensesMachinery Depreciation 1.00 acre 14.50$ 14.50$ 7,250.00$ Machinery Interest 1.00 acre 10.00$ 10.00$ 5,000.00$ Machinery Taxes & Insurance 1.00 acre 2.00$ 2.00$ 1,000.00$ Land 1.00 acre 400.00$ 400.00$ 200,000.00$ Miscellaneous Overhead 1.00 acre 5.00$ 5.00$ 2,500.00$

Total Cash Ownership Expenses per Acre 431.50$ 215,750.00$

Total Expenses per Acre 547.99$ 273,993.00$

Profit (Return to Management) 201.01$ 100,507.00$

Management Fee 1.00 acre 25.00$ 25.00$ 12,500.00$

Profit (Return to Risk) 176.01$ 88,007.00$

Budget for Soft White Winter Wheat 2013 Crop Year

Cost of Production = Break-even Yield = Break-even Price = Sensitivity Analysis:

Analyzing Enterprise Budgets

Price per bushel ($)

Break-even Yield (bu)

$6.50 84.3$7.00 78.3$7.50 73.1

Yield (bu.) Break-even Price ($)

90 $6.09100 $5.48110 $7.98

Total Cost (Total expenses per acre)Yield (per acre)

Cost of Production (per bushel)

To Solve for Cost of Production:

Quantity Price or Value or Total ValuePer Acre Unit Cost/Unit Cost/Acre or Cost

Gross RevenueWheat Grain 100.00 bu. 7.49$ 749.00$ 374,500.00$

Government PaymentsTotal Gross Revenue For Wheat Grain 749.00$ 374,500.00$

Operating ExpenseSeed 90.00 lb. 0.29$ 26.10$ 13,050.00$ Fertilizer 55.00 lb. 0.33$ 18.15$ 9,075.00$ Pesticides 30.00 lb. 0.29$ 8.70$ 4,350.00$ Fuel, oil, lubrication 1.00 acre 6.00$ 6.00$ 3,000.00$ Machinery Repairs 1.00 acre 13.00$ 13.00$ 6,500.00$ Labor 2.00 hr. 20.00$ 40.00$ 20,000.00$ Interest 50.40 $ 0.09$ 4.54$ 2,268.00$

Total Operating Expenses per Acre 116.49$ 58,243.00$

Net Returns Above Operating Expenses 632.51$ 316,257.00$

Cash Ownership ExpensesMachinery Depreciation 1.00 acre 14.50$ 14.50$ 7,250.00$ Machinery Interest 1.00 acre 10.00$ 10.00$ 5,000.00$ Machinery Taxes & Insurance 1.00 acre 2.00$ 2.00$ 1,000.00$ Land 1.00 acre 400.00$ 400.00$ 200,000.00$ Miscellaneous Overhead 1.00 acre 5.00$ 5.00$ 2,500.00$

Total Cash Ownership Expenses per Acre 431.50$ 215,750.00$

Total Expenses per Acre 547.99$ 273,993.00$

Profit (Return to Management) 201.01$ 100,507.00$

Management Fee 1.00 acre 25.00$ 25.00$ 12,500.00$

Profit (Return to Risk) 176.01$ 88,007.00$

Budget for Soft White Winter Wheat 2013 Crop Year

Total Cost (Total expenses per acre)

$547.99

Yield (per acre) 100Cost of Production (per bushel)

$5.48/bu.

To Solve for Break-even Yield:

Quantity Price or Value or Total ValuePer Acre Unit Cost/Unit Cost/Acre or Cost

Gross RevenueWheat Grain 100.00 bu. 7.49$ 749.00$ 374,500.00$

Government PaymentsTotal Gross Revenue For Wheat Grain 749.00$ 374,500.00$

Operating ExpenseSeed 90.00 lb. 0.29$ 26.10$ 13,050.00$ Fertilizer 55.00 lb. 0.33$ 18.15$ 9,075.00$ Pesticides 30.00 lb. 0.29$ 8.70$ 4,350.00$ Fuel, oil, lubrication 1.00 acre 6.00$ 6.00$ 3,000.00$ Machinery Repairs 1.00 acre 13.00$ 13.00$ 6,500.00$ Labor 2.00 hr. 20.00$ 40.00$ 20,000.00$ Interest 50.40 $ 0.09$ 4.54$ 2,268.00$

Total Operating Expenses per Acre 116.49$ 58,243.00$

Net Returns Above Operating Expenses 632.51$ 316,257.00$

Cash Ownership ExpensesMachinery Depreciation 1.00 acre 14.50$ 14.50$ 7,250.00$ Machinery Interest 1.00 acre 10.00$ 10.00$ 5,000.00$ Machinery Taxes & Insurance 1.00 acre 2.00$ 2.00$ 1,000.00$ Land 1.00 acre 400.00$ 400.00$ 200,000.00$ Miscellaneous Overhead 1.00 acre 5.00$ 5.00$ 2,500.00$

Total Cash Ownership Expenses per Acre 431.50$ 215,750.00$

Total Expenses per Acre 547.99$ 273,993.00$

Profit (Return to Management) 201.01$ 100,507.00$

Management Fee 1.00 acre 25.00$ 25.00$ 12,500.00$

Profit (Return to Risk) 176.01$ 88,007.00$

Budget for Soft White Winter Wheat 2013 Crop Year

Total Cost (Total expenses per acre)Output Price

Break-even Yield (bu./acre)

Total Cost (Total expenses per acre)

$547.99

Output Price $7.49Break-even Yield (bu./acre)

73.1

To Solve for Break-even Price:

Quantity Price or Value or Total ValuePer Acre Unit Cost/Unit Cost/Acre or Cost

Gross RevenueWheat Grain 100.00 bu. 7.49$ 749.00$ 374,500.00$

Government PaymentsTotal Gross Revenue For Wheat Grain 749.00$ 374,500.00$

Operating ExpenseSeed 90.00 lb. 0.29$ 26.10$ 13,050.00$ Fertilizer 55.00 lb. 0.33$ 18.15$ 9,075.00$ Pesticides 30.00 lb. 0.29$ 8.70$ 4,350.00$ Fuel, oil, lubrication 1.00 acre 6.00$ 6.00$ 3,000.00$ Machinery Repairs 1.00 acre 13.00$ 13.00$ 6,500.00$ Labor 2.00 hr. 20.00$ 40.00$ 20,000.00$ Interest 50.40 $ 0.09$ 4.54$ 2,268.00$

Total Operating Expenses per Acre 116.49$ 58,243.00$

Net Returns Above Operating Expenses 632.51$ 316,257.00$

Cash Ownership ExpensesMachinery Depreciation 1.00 acre 14.50$ 14.50$ 7,250.00$ Machinery Interest 1.00 acre 10.00$ 10.00$ 5,000.00$ Machinery Taxes & Insurance 1.00 acre 2.00$ 2.00$ 1,000.00$ Land 1.00 acre 400.00$ 400.00$ 200,000.00$ Miscellaneous Overhead 1.00 acre 5.00$ 5.00$ 2,500.00$

Total Cash Ownership Expenses per Acre 431.50$ 215,750.00$

Total Expenses per Acre 547.99$ 273,993.00$

Profit (Return to Management) 201.01$ 100,507.00$

Management Fee 1.00 acre 25.00$ 25.00$ 12,500.00$

Profit (Return to Risk) 176.01$ 88,007.00$

Budget for Soft White Winter Wheat 2013 Crop Year

Total Cost (Total expenses per acre)Yield (per acre)

Break-even Price ($/acre)

Total Cost (Total expenses per acre)

$547.99

Yield (per acre) 100 bu.Break-even Price ($/acre)

$5.48

Price Sensitivity Analysis

Cost of Production ÷

Yield = Break-even Price

$547.99

$547.99

$547.99 100 bu. $5.47/bu.

$547.99

$547.99

Yield Sensitivity Analysis

Cost of Production ÷

Yield = Break-even Price

$547.99

$547.99

$547.99 $7.49 73.1 bu./acre

$547.99

$547.99

Whole Farm Budget

Goal is to find the optimal combination of enterprises based on:

Maximizing profit Resources Moving towards long term goals Crop rotations

Take your management to the next level: use linear programming in Microsoft Excel to determine profit maximizing enterprise combination for your resources.

Whole Farm Budget

Quantity UnitPrice or

Cost/UnitTotal Value

or CostGross Revenue

Wheat Grain 50,000 bu. $7.49 $374,500.00Alfalfa 1,445 ton $200.00 $289,000.00

Total Gross Revenue $663,500.00Operating Expense

Wheat Grain 500 acre $116.49 $58,245.00Alfalfa 250 acre $250.00 $62,500.00

Total Operating Expenses $120,745.00Net Returns Above Operating Expenses $542,755.00Ownership Expense

Machinery Depreciation $10,500.00Machinery Interest $17,000.00Machinery Taxes & Insurance $7,500.00Land $300,000.00Miscellaneous Overhead $6,000.00

Total Ownership Expenses $341,000.00Total Expenses $461,745.00Profit (Return to Management) $201,755.00

Management Fee $187,500.00Profit (Return to Risk) $14,255.00

Whole Farm Budget2013 Crop Year

Cash Flow Budgeting

Cash flow budgets estimate cash inflows and outflows for the

crop year. Inflows – sales, new loans, crop payments, sale of capital assets Outflows – expenses, loan repayment, taxes

Critical for strategic and tactical management. Anticipates cash shortages Analyzes ability to repay loans Determine manageable amounts for borrowed capital

Cash flow is concerned with timing.

Cash Flow Budgeting

Farm/Ranch Name Columbia Basin Farms Co.Total January February March April May June July August September October November December

Beginning cash balanceOperating ReceiptsCapital ReceiptsNon Farm Income

Investment IncomeTotal Cash Inflow

Operating ExpensesFeed and grainHired LaborInsuranceProperty taxesRepairsSuppliesUtilities

Total Cash Operating Expenses

Capital ExpendituresOther Expenditures

Family living expense Income Taxes

Scheduled Debt RepaymentsTotal Cash OutflowCash Available

New BorrowingPayments on New Short Term DebtTotal New Debt PaymentsEnding Cash Balance

Farm/Ranch Name Snake River RanchTotal January February March April May June July August September October November December

Beginning cash balance 5,250 22,690 3,265 7,730 19,345 14,950 34,975 27,725 94,525 75,235 43,935 76,615Operating Receipts

Wheat Sales 95,150 30,400 27,000 37,750Feeder livestock 72,750 72,750

Capital ReceiptsBreeding livestock 13,600 1,600 12,000

Non Farm IncomeInvestment Income 1,950 975 975

Total Cash Inflow 609,690 37,250 23,665 15,265 7,730 19,345 41,950 34,975 101,450 94,525 75,235 81,685 76,615

Operating ExpensesFeed and grain 4,760 775 775 675 785 675 1075Fertilizer 21,600 9,000 12,600Hired Labor 7,800 2,600 2,600 2,600Property taxes 4,720 2,360 2,360Supplies 1,240 220 285 325 410Utilities 2,560 365 325 300 225 195 175 125 125 130 155 195 245

Total Cash Operating Expenses 42,680 10,360 1,100 3,335 510 195 2,775 3,050 2,725 15,090 1,350 870 1,320

Capital ExpendituresBreeding Livestock 6,400 6,400

Other ExpendituresFamily living expense 51,800 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 5,600 Income Taxes 8,675 8,675

Scheduled Debt RepaymentsLong Term - interest 10,550 900 9,650 - principal 45,800 7,800 38,000

Total Cash Outflow 165,905 14,560 20,400 7,535 13,385 4,395 6,975 7,250 6,925 19,290 5,550 5,070 54,570Cash Available 443,785 22,690 3,265 7,730 -5,655 14,950 34,975 27,725 94,525 75,235 69,685 76,615 22,045

New Borrowing 25,000 25,000Payments on New Short Term Debt 25,750 25750Total New Debt Payments 25,750 25,750Ending Cash Balance 22,690 3,265 7,730 19,345 14,950 34,975 27,725 94,525 75,235 43,935 76,615 22,045

Personal Budgeting

You need to keep your personal finances separate from the

business. Elevates false sense of security Manage personal lifestyle Preparation for retirement, college, life events

Monthly budgets should consider all income, expenses, and savings. 0-based budget Variable income? Budget off your lowest average income

Personal Budgeting Fundamentals

Personal Budget Categories

Income: Family farm expenses

(salary) Spouse’s income Non-farm income

Expenses: Tithe & Charitable Giving (10%) Food (5-10%) Housing (25-30%) Utilities (5-10%) Transportation (10-15%) Clothing (2-7%) Savings (5-10%) Medical (5-10%) Personal (5-10%) Recreation (5-10%)

Developing personal budgets takes time and patience.

It will take at least 3 months to have an accurate budget

Personal budgets should be developed for each month. Revenue and expenses should reflect time of year, holidays,

traveling, birthdays, and other important events

Update your budget with actual numbers several times a month. This will help you stay on track and meet goals

Personal Budget Reminders

Homework

Gather information for your enterprise budgets, cash flow budget, and whole farm budget.

Complete your enterprise budgets, cash flow budget, and whole farm budget.

Calculate your break-even price, break-even yield, and cost of production.

Complete your personal budget for this month.

Take a minute to write down one or two ideas or takeaways

from this lesson.

One Minute Takeaway

Sieverkropp Consulting LLC.

Contact: Elizabeth Sieverkropp esieverkropp@gmail.com (509) 398-6858

Website: www.sieverkroppconsulting.com

Training Program Homepage:www.sieverkroppconsulting.com/fsa-borrower-training-program-homepage