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Create enterprise budget to see what’s providing profits to your farm

By Craig Chase, Iowa State University

You are bent over harvesting your tomatoes, windrowing your small grains, or milking cows. As you’re working, do you wonder if what you are harvesting or collecting makes a profit? What kind of return on your investment of labor, land, and equipment are you getting? These may not be things you think about while busy in the field or barn, but they are things you need to think about if you want to run a sustainable farm business.

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Learn more about enterprise budgets and other topics that could help your farming operation become more profitable in the MOSES book Fearless Farm Finances.

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The best way to determine profitability of a specific crop or livestock operation is to develop an enterprise budget. An enterprise budget is an estimate of the costs and economic returns (profit) for a particular crop or livestock enterprise.

Enterprise budgets allow you to look at the details you can use to make decisions about improving profit, improving your quality of life (such as reducing labor at certain times of the year without reducing profit), or achieving some other business or personal goal. Creating an enterprise budget guides you to the specific inputs and resources (labor, machinery, and land) needed and how that is balanced by the income you generated by selling that particular crop or livestock. It will give you information that can help you see where you are making money, and allow you to make informed decisions if you wish to make changes.

Formats for enterprise budgets vary in complexity, layout, and assumptions. Templates can be found from most state agricultural universities. We present some in the Fearless Farm Finances book and will have some available at our Fearless Farm Finances workshops.

The enterprise budget examples we will present, and those shown on websites and from universities, will use generalized numbers shown as examples only. Your own actual farm data which you will gather may differ significantly from the examples presented. We don’t recommend that you make any decisions on your farm based on our examples. It is important, and valuable, for you to develop your own enterprise budgets based on your own farm records.

While you probably won’t have time to develop these budgets during harvest season, it is a great time to at least develop the harvest and sales records that you can use later.

Format for Enterprise Budget
A typical enterprise budget consists of five sections. The first section shows the total amount of product produced and sold multiplied by the price it was sold at (the revenue). This is where the yields and prices that you track as you harvest are needed.

The second section is the cost of the production inputs. This includes items such as fertilizers, feed, veterinary, and other field or bed preparation costs. Your pre-harvest activities and costs are included here.

The third section is the harvest component of the budget, and includes costs associated with harvest (primarily labor) and harvest packaging.

The fourth section includes the cost of ownership. As we discuss in the Fearless Farm Finances book, each farm has assets included on its balance sheet, such as the land, farm buildings and equipment. These assets are used in your farming operation to generate revenues, and, hopefully, some net farm income. The enterprise budget must include some way to account for these costs of ownership. There are various ways to allocate the relevant portion of cost of asset ownership to each enterprise, which we explain in the book and workshop. One simple way is to take all of the ownership costs and divide by the percent of your farm acreage used by this particular enterprise, another is to use the percent of total sales income that your enterprise is of the farm total. You can decide on the method to use based on the type of operation.

The fifth and last section is where you simply add up all the cost components and subtract them from the revenue (section 1) and see if the number is positive (net income) or negative (net loss).

If your enterprise is contributing to net income, then the question becomes: is it contributing a lot or just a little? Determining profit margins is really beneficial to evaluating which of your enterprises is contributing and meeting your financial goals and which are not.

If your enterprise is not contributing to net income very much or at all, you need to determine why. This is where an enterprise budget really comes in handy. You can use an enterprise budget to guide changes you can make to your production practices, evaluate your price, and/or alter the mix of products that you are currently producing.

A change in product mix is easiest for those producing fruits and vegetables and hardest for farmers with fewer crop and livestock alternatives. Let’s look at some real-life farmer examples to see how this works. While these examples are vegetable-focused, the principles are the same regardless of farming operation.

Examples
A CSA produce farm in Iowa was growing a wide variety of products for CSA members and selling extra produce to local restaurants. Without developing an enterprise budget for carrots, the producer decided to sell carrots at $.50 per pound wholesale. When he did an enterprise budget, he found his production and marketing costs were $.68 per pound. He was glad to have done the budget, as he could see that at $.50 per pound he was losing money on carrots. He didn’t think the wholesale buyers would pay more, so he needed to think of other options.

The producer decided to add a third row to the carrot beds, increasing yields significantly while increasing costs only slightly. This change in production practice lowered the cost of production and marketing to $.38 per pound. Not only did the farmer now have a profit margin on the carrots sold wholesale, he also had a higher profit margin on those sold and distributed within the CSA.

A different CSA farm in Iowa was growing a similar mix of products. However, this farm included a French filet type of green bean which the CSA customers really enjoyed. An enterprise budget was developed and determined that 18 hours of labor per bed (4 ft. by 100 ft.) was used to produce and market that crop. The producer looked at some of the other crops within the CSA box and determined the profit per labor hour used for several of them, too. While green beans were profitable, they required a large portion of labor at a busy time of year. The producer decided to reduce the number of beds in green beans, replacing them with other crops with a higher income per labor hour. Because labor was the constraint (only so many hours in a week, and so many hands to do the work),
moving from higher to lower labor crops increased the overall profitability of the farm.

A third pair of vegetable producers in Iowa developed enterprise budgets for the signature crops which the farm was known for. Since they sell a lot of each crop, it is important to have each be profitable. The farmers reviewed the profit margins for each of their key products, and shared those margins with their buyers. This supported an argument on why their prices needed to be increased. The buyers recognized the quality of the products, along with the farmers’ need to have a financially sustainable operation, and agreed to the new prices.

You can make these same types of changes to your farming operations (production practices, product mix, and pricing) if you have the right information. The right type of information includes harvest (yield and price) records, which you could record now. To do an analysis of the current harvest, you would also need to think back over the production year or look at your field records and list out the production practices you used. You’d then estimate the labor involved for each particular crop you are studying, as well as the costs of all of the inputs. You would then need to allocate your fixed assets (land and machinery) to your enterprises. With all of this information you could come up with a very useful enterprise budget for each crop you track.

 

Craig Chase is a local food systems program manager for Iowa State University, and co-author of Fearless Farm Finances, published by MOSES.

 

From the September | October 2016 Issue

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