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.
Components of an Enterprise Budget
The total sales of product or services from the enterprise. Revenue can be calculated with the following formula: Price x Units Sold = Total Income
Cost items that vary with production volume. Examples of such items include fertilizer, seed, fuel, electricity, labor charges, pesticides, packaging cost, and custom charges.
Those costs that you will incur regardless of whether you produce any output. These costs are determined using the DIRTI 5 method which includes Depreciation, Interest, Repairs, Taxes, and Insurance. Often a piece of equipment or building will be used for more than one enterprise. In these cases it is important to estimate the percentage of use for each enterprise and allocate the cost accordingly.
Net Income is the money left after subtracting variable and fixed cost. This is the bottom line.
NET INCOME = Total Income - (Variable + Fixed Costs)
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.
|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|