ALTERNATIVE AGRICULTURAL ENTERPRISES
PRODUCTION, MANAGEMENT & MARKETING
Cooperative Extension System ❚ Agricultural Experiment Station ❚ CIS 945
and the budgeting process
R. L. Smathers
As a business owner, the primary problem you face is
a limited supply of resources — land, labor, and
capital available to accomplish your goals. Allocating
these scarce resources entails making many decisions.
Specific decisions might include: What should I grow
this year? How much fertilizer should I apply?
Should I replace my worn-out tractor? Should I
expand by purchasing or renting additional land? The
answers to these questions could influence the
profitability of your operation for years to come.
Regardless of the scope of the issue being considered,
you must sit down with pencil and paper and analyze
the question. Budgeting does just that; budgeting
coordinates resources, production, and expenditures.
It is implementing a business on paper before any
resources are committed to production; it helps you
predict the consequences of an adjustment in your
operation before ever making the adjustment. While
farm records serve as a record of the past, budgets are
an anticipation of the future. After budgets are done,
they become a standard for monitoring what actually
happens in the operation.
The usefulness of a budget depends on the reliability
of the information used to create the budget. Unrealis-
tic estimates of prices, yields, or input quantities
would lessen the accuracy of the budget and could
possibly lead to a faulty decision. Sound management
decisions can be made using budgets, but care must
be exercised in using only reliable information.
Types of budgets
There are four types of budgets that will be discussed
here, each playing a different role in decision making.
The budgets most commonly used by agricultural
producers are whole farm, partial, cash flow, and
Whole farm budget
This budget is a summary of expected income,
expenses, and profit for the entire farm