- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1350) Unit Title: Financial Planning and Analysis ____________________________________________________________________________ (CLF1352) Topic: BUDGETING AND FINANCIAL Time Years PLANNING 2 Hours 3 / 4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson, the student will be able to: Learning Outcome #: (H-1) - List the purposes of budgeting. (H-2) - List the different kinds of budgets. (H-3) - Arrange in order the steps in developing a budget. (H-5) - Demonstrate the ability to complete an enterprise budget for an agribusiness. Special Materials and Equipment: Copies of the budget page from the California Vocational Agriculture Record Book and California Cooperative Extension crop and livestock budgets (available from Cooperative Extension) References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Resources: California State Dept. of Education, Career Vocational Education Unit, Agriculture Education Program. (1989). CALIFORNIA VOCATIONAL AGRICULTURE RECORD BOOK & MANUAL [2 separate items]. Available from: Tom Munter, Asst. State FFA Advisor, California State Dept. of Education, P.O. Box 944272, Sacramento, CA 94244-2720 Phone: (916) 445-4972 & Fax: (916) 322-5429 Deere & Company. (1987). FARM AND RANCH BUSINESS MANAGEMENT (2nd ed.). Available from: John Deere Technical Services, Department F, John Deere Rd., Moline, IL 61265. Evaluation: Unit quiz by instructor, activity assignments TOPIC PRESENTATION: BUDGETING AND FINANCIAL PLANNING A. The budget is the financial part of a farm plan. The budget is an estimate of the expenses and income which will come about through business activity. There are three kinds of budgets used by agribusiness: 1. A financial plan for the entire business or farm 2. A financial plan for one production process, known as the enterprise budget 3. A financial plan testing the effects of a change in business or production practices, known as a partial budget B. Purposes of Budgeting 1. Budgeting forces a manager to take a careful inventory of all the resources available to the business. 2. Budgeting allows changes in business practices to be tested on paper before any money is actually invested. 3. Budgets provide information necessary for developing a cash flow projection and obtaining credit. The budget is a key part of the business plan. C. The budget looks at the farm business in future planning periods. The same analysis techniques are used in evaluating expected performance as are used to look at past business performance. Thus, at the end of the budgeting process, the manager looks at the profitability, solvency, and liquidity/cash flow characteristics of the plan. D. Steps in Developing a Budget: 1. Evaluate the goals of the business. 2. Inventory the resources available for use, including: a. Land b. Labor supply c. Capital available d. Skill and knowledge of management e. Equipment capabilities f. Government programs 3. Select enterprises to be budgeted. 4. Estimate the cost of the resources to be used in production. 5. Estimate the costs of production. 6. Estimate the price which will be received for the product. 7. Estimate the returns from the enterprise. a. Returns should be calculated in terms of the profit returned per dollar of investment. This makes comparing enterprises or enterprise mixes more accurate. b. If product prices vary considerably from one year to another, the budget should be estimated using a low, average, and high product price level. E. Four Major Considerations in Budgeting: 1. Is the plan technically feasible? a. Technical feasibility answers the question, "Can it be done?" b. The technical feasibility of the process and the production system to be used must be clearly outlined in detail before budgeting begins. Then the inputs can be priced and put into the budget. 2. Is there a market for the product? a. The basic question is, "Will I be able to sell all of the product?" b. This is especially important when considering specialty enterprises that have small or limited markets. 3. Is it profitable? a. The question to be answered here is, "Will I make money on the project?" b. The accuracy of the cost and product price estimates used in the budget dramatically affect the projected profitability of the enterprise. 4. Is it financially feasible? a. The question to be answered is, "Do I have access to sufficient funds to carry out the project?" b. Interest costs need to be considered in making the budget. Liquidity and cash flow effects of the enterprise on the whole business are an important consideration. The cash flow projection will determine the possible effects of the enterprise on liquidity. F. Sources of Information for Budgeting 1. The budget is only as good as the information which goes into it. 2. Realistic estimates of costs and product prices are essential. 3. Sources of cost data include: a. Farm records b. Records kept by other producers c. Information on costs of production available from Cooperative Extension Service d. Professional farm management consultants e. Industry publications 4. Sources of price information include: a. California Department of Food and Agriculture Crop Reporting Service b. Commodity and produce brokers c. Other producers d. Cooperative Extension Service _________________________________________________________________ ACTIVITY: 1. California Cooperative Extension has prepared example budgets on dozens of farm commodities. Obtain copies of a number of these budgets and analyze them to determine the relative profitability of three enterprises. The quality of the estimates used, and the financial (capital) requirements of the enterprise should also be assessed. 2. Develop an enterprise budget using the budget format provided in the California Vocational Agriculture Record Book. Practice problems are available in the Record Book Manual. _________________________________________________________________ ==============================NOTE TO INSTRUCTOR============================ Costs of production and enterprise mix are consistent in Lesson CLF1204 and CLF1206 respectively. ============================================================================ 12/12/91 EEZ/JA/sg #%&C