Budgets

Chapter #4

What are the factors of production?

• Capital• Labor• Land• Management

What questions must a manager ask about the factors of production?

• What are the factors of production?• What is the best way to use the available factors?• What crops can be grown?• What proportion of the land should be used for

each crop considered?• What labor is necessary?• What capital is needed?• What management and production practices should

be used?

What is Budgeting?

• A plan of action for a business• projected income & expenses

Why Budget?

• helps plan for the useful life of assets• excellent device for organizing• useful when credit is needed• allows experimentation with possible outcomes

before committing actual resources• identifies cost and income items that might be

overlooked• lets you refine and organization

What are the types of Budgets?

• Enterprise Budgets - one production process for one production period

– ex: wheat, calves• Partial Budgets-a change in the farm

– ex: should I buy a combine instead of hiring custom combiners?

• Whole Farm Budgets - entire farm

What are the economic principles of budgeting?

1) Invest more if returns increase

2) Invest as little as possible

ex: least cost ration

3) Invest in a different product if returns are greater

4) Invest money where it will earn the highest returns

5) Discount for time and risk

Where do you get budget information?• actual farm records• area analysis• sample budgets• county averages and production data• magazines and literature• meetings & classes• neighbors• computer networks

What are the limitations of Budgeting

• predicting is difficult• consider risk• when determining estimates, managers tend

to overestimate income and underestimate costs

• be realistic

Guidelines for Budgeting

1) Decide what you want to analyze

2) Decide whether to use Enterprise, Partial, or Whole Farm Budget

3) Choose time period

4) Decide what data will be needed

5) Decide how many alternatives will be evaluated

What are the steps in developing a Budget?

1) Determine goals & objectives

2) Inventory resources

3) Select the data for inputs and outputs

4) Select market prices for inputs and outputs

5) Calculate expected costs and incomes (include variable & fixed)

What is the Moral of this story?

• Good Planning = Increased Returns