Term
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Definition
| Provides an estimate of the potential revenue, expenses and profit for a single enterprise. they can be created for differenst levels of production or types of tecnology so there can be more then one for a given enterprise. |
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Term
| Purpose, use and Format of an enterprise budget |
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Definition
-estimate the projested costs, returns, and profit per unit for the enterpises.
-they have many uses by helping identify the more profitable enterprises to included in the whole farm plan.
-source of date for other types of budgeting |
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Term
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Definition
| income above variable costs i |
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Term
Variable costs
operating or direct costs |
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Definition
| arise form the actual operation of the enterprise, these cost wouldnt exist except for the production from this enterprise. |
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Fixed Costs
ownership or indirect costs |
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Definition
| the fixed costs that arise from owning machineery, buildings, or land. they result from owning assets and would esist even if they were not used for this enterprise. |
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Term
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Definition
Economic budgets include opportunity costs
}What is the value of the next best alternative for your land or capital?
}Include land rent in an economic budget
}If you weren’t farming, you could rent your land
}Include the cost of your labor
}If you weren’t farming, you could work elsewhere
}Include interest on your investment in machinery and operating capital
}You could alternatively put your money in the bank |
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Term
| Why use economic budgets? |
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Definition
}An economic budget values all factors of production
}If returns are positive then the operation is profitable and you are earning returns to risk & management – you are economically sustainable
}If returns are negative, then you would be making more money by investing your assets elsewhere |
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Term
Scenario: buy a bull for $5,000. Plan to keep it 5 years and it will be worth $500 at that time. How do you calculate the annual fixed cost to your operation? |
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Definition
Interest:
(Purchase + Salvage)/2 x interest rate
(5,500)/5 x 5.5% = $1100 x .055 = $60.55
Depreciation:
(Purchase – Salvage)/Years of Life
(5,000 – 500)/5 = $900
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Term
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Definition
The average cost of producing one unit of the commodity.
Cost of Production = Total Cost/Yield
}A profit is made when the product can be sold for more than its cost of production.
}Same thing could be done for TVC! |
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Term
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Definition
}The yield necessary to cover all costs at a given output price:
Break-even yield = Total cost/Output price |
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Term
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Definition
}The output price needed to just cover all costs at a given output level:
Break-even price = Total cost/Expected yield |
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Term
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Definition
An outline or summary of the type and volume of production to be carried out on the entire farm, and the resources needed to do it
§Think “physical” plan |
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Term
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Definition
When the expected costs and returns for each part of the plan are organized into a detailed financial projection for the entire business
Think “financial” plan |
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Term
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Definition
Analyzing how changes in key budgeting assumptions affect income and cost projections.
Reduce the gross farm income by 10%:
§Decrease in production or selling prices.
Construct several budgets using different values for key prices and production rates:
§High, average, low approach? |
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Term
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Definition
The ability of the business to meet cash flow obligations as they come due.
Include:
§Cash farm income.
§Income from nonfarm work and investments.
§Cash farm expenses.
§Cash outlays to replace capital assets.
§Principal payments on term debts.
§Nonfarm cash expenses for family living costs and income taxes.
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Term
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Definition
Short-Run
Assume some resources are fixed.
Assume prices, costs, and other factors are expected to hold true over the next production period.
Long-Run
Very few farms or ranches are profitable every year.
A plan that involves long-term investment and financing decisions should project a positive net income in a typical year.
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Term
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Definition
examines only those cost and return factors that change as a result of making an adjustment in the business. |
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Term
| Examples of partial budget problems |
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Definition
Substitution of one crop for another. Adoption of a new production practice. Participation in a government program. Owning machinery versus custom-hiring. |
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Term
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Definition
A cash flow budget is a summary of the projected cash inflows and outflows for a business over a given period of time.
Future accounting period is divided into “appropriate” periods (typically months).
Purposes:
§Estimate the ability of the business to pay financial obligations on time.
§Estimate the amount and timing of future borrowing needs.
§Assess cash flow needs for longer term investments. |
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Term
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Definition
2. Cash flow budgeting helps answer these questions when planning new investment projects (longer term):
§Is the project feasible (financial feasibility), bottom line profits.
§Will there be sufficient capital available when it is needed?
§If not, how much will need to be borrowed?
§Will the project generate the cash needed to repay any new loans?
§In this longer term case, does a monthly cash-flow make sense? |
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Term
Whole-Farm Budget V. a Cash Flow Budget
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Definition
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looks at “Cash” only.
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“Timing”
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Term
| Uses for a Cash Flow Budget |
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Definition
1.Project the timing and amount of new borrowing that the business will need during the year and the timing and amount of loan repayments.
2.Help in developing a borrowing and debt repayment plan:
§Prevents excessive borrowing.
§Saves on interest expense.
3. Suggest ways to rearrange purchases and scheduled debt repayments to minimize borrowing:§Capital expenditures and insurance premiums could be moved to months with large cash inflows.
4. Combines business and personal finances.
5. Helps lenders: §Offer better financial advice.
Spot weaknesses.
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