University of Maryland Extension

Enterprise Budgeting

Small farms will often consist of many different enterprises that contribute to the whole farm operation. For instance, one farm operation may have a retail produce market, horse hay sales, and a fall petting zoo. It is important to understand the returns, various costs, and ultimately the profitability of each enterprise versus another. The “Enterprise Budget” enables you to do that.

It is important to generate good estimates for sales quantity.  Your sales are a factor of yield and price.  As you estimate your gross income, remember that income should be based on products sold not total production yield.   Production can be affected by harvest lost, damaged goods, transportation loss, storage loss and unsold production.  The general term used for this loss is shrinkage.  Shrinkage should be considered when entering the quantity of goods sold in the enterprise budget.

The enterprise budget separates and allocates the various farm expenses and receipts to a particular enterprise. As a result, you can understand break-even cost and pricing points for that enterprise. It is also helpful to understand the input structure such as shelf space pricing structure, raw material inputs, fixed equipment cost and labor inputs.  Operator and family labor costs are an important and often overlooked expense.  Be sure to include an expense line in your enterprise budget to address these costs.  Often overlooked labor expenses include office work, marketing, repairs and networking. 

The enterprise budget also forces you to analyze the profitability of each enterprise so the proper enterprise mix for the farm can be achieved.  In order for enterprise budgets to be effective, you must have accurate information on each enterprise being planned. This requires careful recordkeeping of existing enterprises and detailed projection of activities of planned enterprises.

The budget is calculated based on a one-year time frame for a certain unit of production such as acre or per head of livestock. Enterprise budget components are illustrated in the following graphic.

Methods of Analyzing the Enterprise budget

The enterprise budget can provide a producer with much more information than just net income. The budget can help determine sales needed to cover variable cost, fixed cost, and total costs per unit. This information can be utilized to determine pricing points, to identify efficiencies within the enterprise, and for the continuation of an enterprise. The chart below describes various analysis methods.

Break-Even Analysis:

Enterprise Analysis Methods

Formula

Comments

Variable Costs per Unit Sold

Total Variable Cost/Output in Units

You must make at least the variable cost per unit sold, or the enterprise should be discontinued.

Fixed (overhead cost) Costs per Unit Sold

Fixed Cost/Output in Units

In order to be profitable over the long run, you must be able to cover the fixed cost as well as variable cost. Knowing the fixed cost per unit enables you to better understand cost structure.

Break-even Price

Fixed Cost + Variable Cost/Output in Units

This is your break-even price. A pricing point above the break-even point will be needed to generate profit.

Break-Even Output

Fixed Cost + Variable Cost/Price per Unit

This is the output needed at a given price to reach the break-even point. At the given price, output will need to be increased to net income.

Net Income per Unit Sold

Net Income/Output in Units

This is the net income per unit produced.

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