Profitability Using Budgets
Budgets are the first step in any profitability analysis. The basic idea is easy: Revenue minus Cost. The devil is in the details: predicting prices received, quantities produced, and full costs. Three broad types of budgets each answer different questions:
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- Enterprise budgets answer, "What be my net earnings from this activity?"
- Partial budgets answer, "How would my net earnings change if I substitute a different enterprise or way of doing things?"
- Break-even budgets answer, "What would be the lowest price or yield I must receive in order to break even?"
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Enterprise budgets and single-enterprise break-even budgets show profitability when they indicate a positive net income. But sometimes a manager is already earning a positive return from an enterprise that would be replaced by the one under examination.
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Enterprise Budgets: |
Enterprise Budgets in Farm Management
This University of Maryland site explains each section of an enterprise budget, with examples for crop and livestock enterprise budgets.
Interactive Enterprise Budgets
Several university departments of agricultural economics offer these links to interactive enterprise budgets that allow the user to modify a template budget.
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Partial Budgets: |
Using the Partial Budget to Analyze Farm Change
This University of Maryland site explains partial budgets in detail, using examples for changes of crop enterprise and change in machinery use.
Environmental Partial Budgeting: A Framework For Decision Making
This Alabama Cooperative Extension site offers a creative application of the partial budget approach to both monetary and environmental costs and benefits.
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Break-even Budgets: |
Single-enterprise Break-even Analysis
This University of Tennessee site introduces break-even price and yield analysis for a single enterprise.
Break-even Analysis for Changing Enterprises
The basic method for break-even analysis in single enterprises can be extended to look at changing enterprises. The key is to add the "opportunity cost" of net returns that would be foregone in giving up the old enterprise to the variable costs of the new enterprise. A Michigan State University Extension bulletin explains the approach with application to comparing alternative crops.
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