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Junior and Senior level Ag Bus. | |Colorado Agriscience Curriculum

|Section: |Advanced Agribusiness |

|Unit: |Agricultural Business Records |

|Lesson Title: |Budgeting |

|Colorado Ag Education Standards|AGB11/12.03 - The student will be able to formulate and analyze financial records and use the information for|

|and Competencies |evaluation and planning. |

| | |

| |Develop partial budget, enterprise budget, whole farm budget. |

| | |

|Colorado Model Content | |

|Standard(s): |English Standard 1: Students read and understand a variety of materials. |

| | |

| |English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and |

| |viewing |

| | |

| |English Standard 5: Students read to locate, select, and make use of relevant information from a variety of |

| |media, reference, and technological sources. |

|Student Learning Objectives: |Upon completion of this lesson the student will be able to: |

| |Understand and set goals. |

| |List four different types of budgets. |

| |Understand the difference between the budgets and how to use them. |

| |Be able to setup a budget. |

| |Learn and practice communication and basic life skills necessary for working with other people. |

|Time: |100 minutes 2 class periods possibly 3 or 4 class periods |

|Resource(s): |. |

| |. |

| |Twelve Steps to Cash Flow Budgeting. Ag Decision Maker, File C3-15, November 2004, |

| |extension.iastate.edu/agdm. |

| |Cash Flow Budget. William Edwards, Ag Decision Maker, Version 1.0, Iowa State University University |

| |Extension. |

| |c3-15cashflowbudget.xls, c3-15cashflowbudgetshort.xls, b1-21beefcowcalftbl14.xls all by William Edwards, Ag |

| |Decision Maker, Version 1.0. Iowa State University, University Extension. |

| |Partial Budgeting. N.L. Dalsted, Colorado State University Cooperative Extension economist/farm management |

| |and professor, and P.H. Gutierrez, former Cooperative Extension economist/farm management and associate |

| |professor; agricultural and resource economics. 9/92. Reviewed 10/04. |

| |Partial Budgeting: A Tool to Analyze Farm Business Changes. Ag Decision Maker, File C1-50, Robert Tigner, |

| |farm management field specialist. File Economics 1-8, Iowa State University University Extension. |

| |c1-50partialbudgeting.xls. Don Hofstrand, Ag Decision Maker, Iowa State University University Extension. |

| |Enterprise Budgeting. Agriculture and Business Management, Colorado State University Cooperative Extension, |

| |Rod Sharp. |

| |Livestock Enterprise Budgets for Iowa – 2006, Ag Decision Maker, File B1-21, Iowa State University University|

| |Extension. |

| |Enterprise Accounting. Gary G. Frank, October 15, 1997. |

| |Farm Management 4th Edition. Ronald D. Kay & William M. Edwards,The McGraw-hill Companies, Inc. 1999. |

|Instructions, Tools, Equipment,|Italicized words are instructions to the teacher, normal style text is suggested script. |

|and Supplies: |Projector |

| |Whiteboard |

| |Microsoft Excel spreadsheet program |

| |Enough copies of Goal Planning to hand out to students. |

| |Students need to have a list of their goals if they have one, otherwise they will need note book paper to |

| |write them on. |

| |Print outs of power point notes |

| |Print outs of spreadsheets |

| |Nerf balls |

|Interest Approach: |The interest approach will come at the end of the lecture. The instructor will pair up the students. There |

| |are several approaches listed in the curriculum for pairing up the students. Each set of students will be |

| |required to build a budget. They will select their type of budget and the enterprise(s) included. The |

| |instructor should encourage the students to use their real world experiences when choosing their |

| |enterprise(s). The students are to work together to produce a budget they can both live with. This will |

| |belp the students realize that in life their spouse, partner or family member partner, may not have the same |

| |goals, and that they may want to budget their money differently and spend their net income differently. |

|Objective 1: |Turn the sound on the computer |

| |Have students take notes through out the slide show or print out the power point notes for students to follow|

| |along. There will be several E Moments available for the instructor to use. |

| |I bet your wondering why we are talking about goal setting when the class is about budgeting. Financial |

| |budgeting is about making educated predictions for the future, using past and present information. We also |

| |need to know what our future goals are. So lets review quickly. |

| |Why do we set goals? |

| |To plan for the future. |

| |To keep from making emotional decisions by having a plan, in writing. |

| |3. To enhance communication between parties involved by get everyone's view point and input. |

| |There are roughly five steps required to set a goal |

| |1. Be specific. |

| |2. Set a time line. |

| |3. Be realistic. |

| |4. Write it down. |

| |5. Know what is involved to obtain the goal and determine how important it is to you. |

| | |

| |Do you remember the acronym used to remember this? |

| |Read the power point. |

| |Now lets discuss budgets |

|Objective 2: |Farm and ranch management has become more difficult and challenging as a result of rapidly changing |

| |production and economic conditions. A good manager needs to adopt a plan for the future, and one of the tools|

| |available are budgets. |

| |Budgets help you to organize financially and physically. |

| |You can compare costs and returns of alternative plans of action and enterprises for a farm or ranch |

| |business. |

| |Then you should be able to choose a course of action that most nearly matches long-range goals which we have |

| |just talked about. |

| |Remember-all budgets start with a planning session on paper. |

| |Types of Budgeting |

| |The cash flow budget deal with cash. They helps establish the cash needs of the business over a specified |

| |planning period, usually a year. |

| |Further, the cash flow budget helps plan repayment of existing loan obligations. |

| |They help determine repayment ability of new operating loans or longer-term loans |

| |And establish the cash feasibility of a major capital purchase. |

| |The enterprise budget is a physical and financial plan for a specific crop or livestock enterprise. |

| |The enterprise budget estimates expenses and receipts for a specified period of time using a specified set of|

| |production practices. |

| |The third budget is the partial budget. It helps the manager evaluate the economic effect of minor |

| |adjustments in some portion of the business. |

| |Many aspects of business are fixed and have fixed costs, in the short run. |

| |Partial budget can evaluate changes in resource uses that are not fixed or have variable costs. |

| |The whole-farm or ranch budget is a detailed listing of resources of the entire business, along with a plan |

| |to use these resources to achieve long-term goals. |

| |The whole-farm or ranch budget sets the direction the business will take and helps the manager achieve |

| |long-term goals |

| |Family living expenditure budget. This budget can be considered an enterprise and also incorporated into |

| |the whole farm budget, or evaluated separate from the business. |

|Objective 3: |All of the 4 budgets listed have similar processes. To help the student recognize these similarities, as you|

| |lecture, have the students make note of the similarities in each budget and when you repeat information |

| |already given in the lecture. You may also play a game. Divide the students into as many teams as you have |

| |nerf balls. Give each team a ball. When the instructor repeats a procedure in a new budget or information, |

| |the team is to throw the nerf ball at the instructor. The team must tell you why they threw the ball. The |

| |first team to through the ball, and is correct, earns a point. Points are deducted for unnecessary throws. |

| |Team that wins get 10 extra points on the next quiz. |

| |A cash flow budgets is an estimate of all cash receipts and |

| |all cash expenditures that are expected to occur during a certain time period. |

| |Estimates can be made monthly, bimonthly, quarterly, or annually. They may include both non-farm income and |

| |expenditures and farm income and expenditures. |

| |Cash flow budgeting looks only at money movement, not at net income or profitability. |

| |The Key words here are ESTIMATE and CASH. It is all about ESTIMATING your CASH income and expenses. |

| |Remember, the more accurate your ESTIMATE, the more accurate will be your projection and decision-making. |

| |The Key words here are ESTIMATE and CASH. It is all about ESTIMATING your CASH income and expenses. |

| |Remember, the more accurate your ESTIMATE, the more accurate will be your projection and decision-making. |

| |• As a management tool, cash flow budgets force you to think through your farming plans for the year. Again,|

| |we must look at our goals. Throw a ball or make a note for repeating the importance of goals and planning. |

| |• They tests your farming plans: Where will your income come from and will it cover immediate expenses? |

| |•They projects how much operating credit you will need and when. |

| |• They projects when loans can be repaid and help plan for major purchases. |

| |• They provide a guide to compare your actual cash flows to. |

| |• They help you show your lender your farming plans and credit needs. |

| |• They use past year financial and production records. |

| |Instructor will want to start a list on the board. This is just a list. We will start the budget with |

| |slide 18. The power point will use the information found in the PDF file C3-15 Twelve Steps to Cash Flow |

| |Budgeting found at extension.iastate.edu/agdm. |

| |It is better to make the example more personal by asking the class for input. The Excel spreadsheet |

| |c3-15cashflowbudget.xls walks through the planning session as well and is also found at |

| |extension.iastate.edu/agdm. |

| |To get started we need to first outline our tentative plans for livestock and crop production for the year on|

| |paper. |

| |Use your goal planning skills. Throw the ball or make a note for repeating planning. |

| |Remember, this is not carved in stone. You are projecting and planning. |

| |It is a good idea to build these budgets in a computerized spreadsheet as you will probably build more then |

| |one budget so you can look at the time period in several different ways. |

| |Next we need to take inventory of livestock on hand and crops in current storage. Use a recent financial |

| |balance sheet to determine this information. Throw the ball or make a note, repeat information about the |

| |need to use financial records. |

| |Continue with example on the board. See slide 16. |

| |See slide 16. |

| |Estimate feed requirements for the livestock. You may need to do some research if this is a new enterprise. |

| |Enterprise budgets are available at many extension offices. Otherwise, use your farm past feed records. |

| |Throw the ball repeat information about using past records. |

| |See slide 16 |

| |Record your beginning inventories. All ready done with slide 14. |

| |Estimate your expected new crop production. |

| |Finally, estimate the quantity of feed purchases needed, if any, |

| |and the quantity available to sell. |

| |Once your feed supply and feed requirements are estimated, adjust the livestock program to fit them. |

| |Go over your example on the board and discuss what your livestock options look like at this point in the |

| |scenario. |

| |This is slide 16 Double click on table and it will pop into Excel for editing. |

| |Instructor can do one of the following: |

| |Continue with the power point and then develop the cash flow in Excel or use the spreadsheets available with |

| |the curriculum. |

| |2. Print out a spreadsheet available with the curriculum and have the students fill in as you go through the|

| |power point. |

| |3. Print out the power point and hand out to the students and then build a cash flow in excel as the |

| |students follow along with the hand out. |

| |4. Print out the power point and hand out to the students and then use one of the spreadsheets available |

| |with the curriculum |

| |The power point will continue using the spreadsheet “Cash Flow Budget (short form) Example.” |

| |There are 2 prepared spreadsheets that go along with the curriculum. And found at |

| |extension.iastate.edu/agdm. One is a called c3-15cashflowbudgetshort.xls. This is a simpler cash flow. |

| |The other is c3-15cashflowbudget.xls and is much more complicated, but makes some very good points. The |

| |instructor should review the spreadsheets and power point before hand and decide how much of the information |

| |to present. |

| |Now, we are ready to create a cash flow budget using the criteria and goals we have just developed. This |

| |information should be on the board for everyone to view. |

| |Fill out your name and total time period 6 |

| |First, what is our cash on hand? Type it in the beginning of the year in the first period (January). It |

| |will calculate a total in the “Total” column. |

| |You can also specify a minimum cash balance to be carried over from month to month. |

| |Next estimate livestock sales based on production and marketing plans, as shown in the top lines of |

| |Example 3 from 12 STEPS TO CASH FLOW BUDGETING.pdf |

| |Start with livestock on hand, |

| |then add livestock to be produced during the year. |

| |Exclude animals to be carried over to next year or held back for breeding stock. |

| |• Include sales of breeding stock that will be culled. |

| |• Also include livestock product sales - milk or wool. |

| |• Use your best estimate of prices based on outlook forecasts or marketing contracts and past records. Throw |

| |the ball repeat information about using past records. |

| |• Your budget should reflect expected seasonal price patterns. |

| |• Stay on the conservative side. If your plan will work at conservative prices, it will also work at better |

| |prices. |

| |• Some producers prepare budgets at two or three price levels for the major products they sell. Throw the |

| |ball or make a note repeat information about building more then one spreadsheet or adjusting the spreadsheet.|

| |Plan sales of non-feed crops and excess feed. |

| |• Consider crops in inventory at the beginning of the year. Don’t forget crops to be harvested during the |

| |year. |

| |Plan to carry over grain for feed for next year plus other crops normally sold in the following year. |

| |• Plan timing of sales according to when you would normally market your items. |

| |In this example, the farmer plans to sell old-crop soybeans in March and hold new-crop soybeans until after |

| |January 1 of next year. |

| |• Follow the same guidelines for livestock sale for estimating crop prices. |

| |Look at outlook forecasts, |

| |consider seasonal price patterns, and |

| |use conservative price estimates. Information File Crop Planning Prices (A1-10) provides information on |

| |planning prices which can be found at extension.iastate.edu/agdm. |

| |• Multiply quantities to sell by expected prices, and carry the crop and livestock totals to the budget form.|

| |• After the initial cash flow budget is completed, you may want to revise your marketing plans to meet |

| |capital needs throughout the year. Throw a ball repeat information about goal and market planning. |

| |Estimate income from other sources, including: |

| |• government payments |

| |• custom machine work income |

| |• income from off-farm work, rental property, or other business activities |

| |• interest, dividends, patronage refunds, etc. |

| |Last year’s additional cash income listed on your income tax return is a useful guide. Throw a ball repeat |

| |information about using last years records. |

| |We have completed the cash INCOME information. |

| |Now it is time to look at expenses. |

| |Project Crop Expenses and Other Farm and |

| |Family Living Expenditures: |

| |• Last year’s expenditures are a good guide. Throw the ball again. |

| |Adjust for changes in price levels. |

| |• If cropping plans will be different this year, detailed field-by-field production plans or field maps (see |

| |Example 5 in PDF) can be used to estimate expenses. |

| |• Expenses that are determined by contract, agreement, or law can be estimated directly from contract terms, |

| |unless rates are expected to change. |

| |These include property taxes, property and liability insurance premiums, and fixed cash rents. |

| |• Adjust last year’s living expenses for changes in family circumstances and inflation. |

| |If no family living expense records are available, Information File Family Living Expenditures (File C1-20) |

| |found at extension.iastate.edu/agdm can be used. |

| |Remember to allow for possible purchases of personal vehicles, furniture, appliances, or major repairs. This|

| |is real-world stuff that students need to consider. |

| |• A tax estimate made at the end of the year is helpful for projecting income tax and social security |

| |payments. Revise these when your actual tax returns have been filed. |

| |• Expenses should be spaced through the year based on your best judgment. |

| |Some will fall mainly during certain seasons, such as machine hire, part-time labor and crop expenses. |

| |Remember to place these expenses during the period of payment, not the period of use. |

| |Some expenses will be spread through the year but will have definite seasonal peaks. |

| |Fuel, machinery and equipment repair, and utilities are examples. |

| |Other expenses may be spaced evenly through the year, such as |

| |vehicle operating expenses, livestock health and supplies, and living expenses. |

| |We are finished with expenses. |

| |Estimate operating surplus. We are getting close to the bottom line. |

| |• Add total projected cash inflows for the year and for each month, as shown in the sample budget in Example |

| |3. Add the total inflows for each month to check that they equal the total projected inflow for the year. |

| |• Add total projected cash outflows for the year and for each month. |

| |Add the total outflows for each month to check that they equal the total projected outflow for the year. |

| |• Subtract total cash outflows from total cash inflows to determine net operating surplus. |

| |Add the operating surpluses for each period to check that they equal the total operating surplus for the |

| |year. |

| |See example 4 in PDF |

| |Consider capital purchases such as machinery, equipment, land, or additional breeding livestock. |

| |Consider major machinery expenses such as a tractor overhaul. Also, construction or improvement of |

| |buildings. |

| |Example 4 of PDF shows that the farmer is considering trading for a new combine for a cost of $50,000. This |

| |amount is entered under the “Capital Purchases” section. Show only the cash difference to be paid when a |

| |trade is involved. |

| |You may want to complete the rest of the cash flow budget first to see if major capital expenditures will be |

| |feasible this year. |

| |If you need to borrow money for the capital purchase, then include the that loan amount in the “New Term |

| |Loans” section. |

| |Summarize debt repayment: |

| |This information can be taken from your most recent financial statement. Include only those debts that you |

| |have already acquired at the beginning of the budgeting period, not new debt you may want to incure. |

| |Calculate the accrued interest that will be due at the time the payment will be made. |

| |Remember, the financial statement may show only interest accrued up to the date of the statement. |

| |Throw the ball repeat information about using past records. |

| |Finally we are at the bottom! |

| |Calculate the cash flow surplus or deficit by adding the operating surplus for each month to New Term Loans, |

| |then subtracting Capital Purchases and Loan Payments. |

| |If the estimated net cash flows for the entire year and for each month are all positive, you have a feasible|

| |cash flow plan. |

| |If the net cash flows for some months are negative, some adjustments will need to be made. |

| |Divide the class into two teams for a quick round of Jeopardy. |

| |Give the winning team 10 point on their next quiz. |

| |You survived cash flow budgets. Now, lets play Jeopardy and see what we remember. |

| |Q: The first step in developing a budget. |

| |A: What is GOAL PLANNING? |

| |Q: Cash flow budgets help answer When do you need cash and ________ will you get the cash to cover |

| |expenses. |

| |A: What is WHERE? |

| |Q: A good manager uses these to project a cash flow budget. |

| |A: What are PAST FINANCIAL RECORDS? |

| |Q: A positive bottom line for a month and for the whole period. |

| |A: What is A FEASABLE CASH FLOW? |

| |Q: The second type of budget listed on slide 7. |

| |A: What are ENTERPRISE BUDGETS? |

| |Remind the kids to throw the ball or make a note when an enterprise budget is similar to a cash flow budget |

| |or information is repeated. |

| |The instructor should bring up the Excel file b1-21beefcowcalftbl14.xlse and use it while explaining |

| |enterprise budgets. It can be adjusted to fit the instructor's needs.Or go to |

| |extension.iastate.edu/agdm/livestock. for more ag enterprise budget spreadsheets. |

| |An enterprise is a single crop or livestock commodity that actually produces a marketable product. |

| |Quick, give me some examples of enterprises: |

| |Wheat, Swine, A No till verses tilled crop, Cow/Calf, Registered verses Commercial Herd. |

| |An enterprise budget is a listing of all estimated income and expenses associated with a specific enterprise |

| |to provide an estimate of its profitability. |

| |Enterprise budgets help determine if an enterprises should be expanded and identify those that should be cut |

| |back or eliminated. |

| |They can be used in conjunction with partial budgets as we will see later. |

| |They help to compare management practices. |

| |The base unit for enterprise budgets is typically one acre for crops and one head for livestock. |

| |Using common units permits an easy and fair comparison with different enterprises. |

| |Enterprise budgets are generally for one year, however other time periods are permitted. |

| |To identify the most profitable enterprises to be include in a whole farm budget. Enterprises might be |

| |expanded and those that should be cut back or eliminated. They are the basis for partial budgeting. Throw the|

| |ball or make a note, just talked about this. |

| |They contain the data needed to compute the: |

| |Cost of production. |

| |The break-even price and/or production. |

| |The Key word here is SINGLE: Single enterprise, single unit. |

| |Enterprise budget incomes must be separated from other enterprises and/or the whole farm income. |

| |Likewise, expenses must be sorted out from other enterprises and the farm. |

| |Certain resources are used by more than one enterprise. This means a decision must be made regarding the |

| |allocation (by enterprise) of the costs associated with those resources by the manager. |

| |Income/receipts/ revenue; |

| |Variable or operating expenses. Enterprising deal mostly with variable costs. |

| |Fixed expenses. Fixed costs most be allocated between enterprises. Throw the ball or make a note just went |

| |over this. |

| |Summary |

| |Include name, region, year and time period. Throw the ball, note the similarities to the cash flow budget |

| |and the differences. |

| |Lets start with the income/receipts or revenue. |

| |The first step is a planning step just like with the cash flow budget. It is to estimate total production |

| |(output or yield) and expected output price. The estimated yields and prices should be what you expect under |

| |normal conditions. Be realistic! Does this sound familiar? Throw the ball or make a note same as cash flow|

| |Lets start with the income/receipts or revenue. |

| |The first step is a planning step just like with the cash flow budget. It is to estimate total production |

| |(output or yield) and expected output price. The estimated yields and prices should be what you expect under |

| |normal conditions. Be realistic! Does this sound familiar? Throw the ball or make a note same as cash flow|

| |Relative long run prices should be used when doing a planning enterprise budget. |

| |Actual prices should be used when doing a short run planning budget or a financial analysis enterprise |

| |budget. |

| |The internal production cost of feed should not be used as the price of feed in a farm’s livestock enterprise|

| |budgets. |

| |Revenues or Incomes are the results of the production process. Some revenues are shared, hidden, or used by |

| |other enterprises. |

| |With the cash flow budget, we only dealt with cash transactions. Here we must look at Non-cash revenues. |

| |Revenues or Incomes are the results of the production process. Some revenues are shared, hidden, or used by |

| |other enterprises. |

| |With the cash flow budget, we only dealt with cash transactions. Here we must look at Non-cash revenues. |

| |Now on to expenses. |

| |Costs are divided into two groups. Each group has several different names for the same kind of cost: |

| |Operating and Capital; |

| |Variable and Fixed; or |

| |Direct and Indirect. |

| |The cost section usually has less variability and uncertainty than the income section. |

| |If costs are divided into three parts, the third part is labor. Labor is under the operating costs in the two|

| |part system. Labor is sometimes treated separately because of the importance of this cost and/or to show a |

| |return to labor and management in addition to a return over operating costs. This is especially true if all |

| |the labor required for the enterprise budget is the owner’s. |

| |These resources are often used by more than one enterprise. The allocation of costs is based on intent. Throw|

| |the ball or make a note as we have talked briefly about allocating expenses |

| |If the major use is by more than one enterprise, costs for that item should be allocated according to |

| |percentage use. |

| |Example: planter for snap beans and corn. |

| |If cost is mostly use by one enterprise and is used part time by another, only the operating costs for the |

| |time used should be charged to the secondary enterprise. |

| |Example: A 150 H.P. tractor, with a cab, is used on occasion to haul manure in winter; charge only the |

| |operating costs to the livestock for time spent hauling manure, as the operator would not have purchased the |

| |tractor if no cropping was done. |

| |The bottom line is figured by. |

| |Income – OP Costs = Gross Margin. |

| |Gross Margin – fixed costs = return to labor and management. |

| |Return to labor and management – labor/management costs = Profit or loss. |

| |Now would be a good time for an Einstein Moment. Pair up the students. Give each set of students a “genius |

| |name”. Ask the first set of students to listen and take notes about the 1st half of the summary. Then have |

| |those students teach what they learned to their partners. Repeat by having the 2nd set of students listen |

| |and take notes and teach their partner about the last part of the summary. |

| |Two down and two more budgets to go. Lets CHANGE our pace and look at partial budgets. |

| |Remind the kids to throw the ball or make a note when budget information is repeated. |

| |As a business owner, you will have to make decisions about changes in your operation, whether it is something|

| |you are contemplating or something you have to do. Perhaps there has been a drought, or a death in the |

| |family, or you lost a lease or you added land. Maybe the market has turned, for example the corn market made|

| |major changes in 2006-2007. |

| |The partial budget is a useful tool for farm managers when these situations arise. |

| |Partial Budgets help farm owners/managers evaluate the financial effect of changes. |

| |A partial budget only includes costs and incomes that will be changed. |

| |It does not consider the resources in the business that are left unchanged. Some examples might be interest |

| |or depreciation on fixed assets. |

| |Only the change under consideration is evaluated. Will it increase or decrease income in the farm business? |

| |Partial budgets are based on the principle that small business changes have effects in one or more of the |

| |following areas. |

| |Increase in income |

| |Reduction or elimination of costs |

| |Increase in costs |

| |Reduction or elimination of income |

| |The bottom line of the above effects will be the positive financial changes minus the negative financial |

| |changes. (Increased income + Reduced costs)-(Reduced income + Increased costs) = Net change in income |

| |A positive net indicates that farm income will increase due to the change, while a negative net indicates the|

| |change will reduce farm income. |

| |Show spread sheet file c1-50partialbudgetingwithexample.xls also found at extension.iastate.edu/agdm. |

| |The instructor may want to print off copies of the blank budget for students. |

| |Partial Budget Components |

| |The budget can be divided into four parts. |

| |First it is divided into two columns: |

| |The left hand column has items that increase income. |

| |The right hand column has items that reduce income. |

| |The two columns are divided in half: |

| |The top half deals with income increase and decreases. |

| |The bottom half reports expenses decreases and increases. |

| |Then there is a: |

| |a subtotal for each column. |

| |And finally a grand total. |

| |Added Income |

| |If this is a new enterprise you may have to do some research to uncover a reasonable income estimate . |

| |Remember to use realistic yields, product quality and prices. Throw the ball or make a note same as cash |

| |flow and enterprise budget. |

| |Use average prices from the markets where production is most likely to be sold. Throw the ball or make a |

| |note same as enterprise budget. |

| |Also use average quality unless the change under consideration is meant to improve crop or livestock quality.|

| |Note: Income increases may come from expansion of an enterprise. If the expansion is small, current |

| |production quantities, quality and average prices are reasonable approximations to use. But if the expansion |

| |is large, during the early production periods lower yields and quality may result because of start-up |

| |difficulties. Be conservative with your estimates and use your own financial figures if appropriate and when |

| |available. |

| |Added Costs |

| |List all increased expenses due to the change. |

| |For a new enterprise these will probably be production costs. |

| |This list may also include non-cash costs such as labor and depreciation. |

| |For example, it might be good idea to include unpaid labor so that the operator is paid for his/her labor and|

| |management skills. |

| |Throw the ball or make a note: Note similarities to enterprise budget mostly. |

| |Reduced Costs |

| |Obvious items would be crop or livestock expenses no longer incurred. You may even totally eliminate certain|

| |expenses. |

| |Have kids give some examples: Seed, custom work, repairs, veterinary expense, interest expense and paid |

| |labor. |

| |Inclusion of non-cash costs such as unpaid labor and depreciation would provide a full economic analysis. |

| |Partial Budget Summary |

| |Now let see what the bottom line says: |

| |Total each of the two factors in column 1. |

| |and write this result on the column 1 subtotal line. |

| |Repeat the process for column 2. |

| |Then take column 1 (added income + reduced cost) and subtract column 2 (increased costs +reduced income) to |

| |arrive at a projected net return from adoption of the change under consideration. |

| |A negative number indicates the change as considered will reduce whole farm income. |

| |A positive number indicates that the change will be profitable. |

| |See Excel spreadsheet c1-50partialbudgetingwithexample.xls found with curriculum. Click on tab at bottom |

| |labeled Heifer Example. In advance, update income and expenses to more closely represent your region or do |

| |it in class to make the exercise more personal to the students. |

| |Conclusion |

| |Partial budgeting can be useful in helping to decide on alternative uses of resources you have. |

| |What’s nice about it is that it is a systematic approach that reduces the emotional response to change and |

| |can assist you in making educated decisions. |

| |Remember this process can only estimate possible financial impacts, not assure them. |

| |Management decisions and the luck of the draw can change the projections. |

| |These may result in better or poorer than expected performance. |

| |Repeating the analysis using different assumptions about key variables will give some idea about the degree |

| |of risk involved in making the proposed change. |

| |Have the students form teams of three and present a news television show using the terms and information |

| |presented in cash flow, enterprise and partial budgets. |

| |To group the students, have the students find two other people who were born in the same quarter of the year |

| |as they were. Everyone born in Jan-March, April-June, July-September and October-December. You may have to |

| |adjust the groups to make the numbers come out even. |

| |One more budget to go |

| |Instructor may want to revisit c3-15cashflowbudget.xls included with the curriculum. This is an excellent |

| |fallible whole farm budget that shows the steps starting with the planning stage through developing |

| |enterprise budgets to the final whole farm budget. The instructor may also use their own budgets developed |

| |in Excel. |

| |If you have done a good job producing your enterprise budgets and cash flow, your whole farm budget should be|

| |easy to assemble. |

| |Remind students to throw the ball or make a note when a concept is repeated. |

| |The whole farm budget is the last step in the budget process. |

| |It will help estimate cash inflow, outflow and liquidity for the operation. |

| |This processes aids in comparing alternative plans for profitability and liquidity of the farm, and evaluates|

| |the effects of changing other parts of the farm plan on the entire operation. |

| |It helps estimate the need and availability of resources like land, capital, labor, feed needed for livestock|

| |and even irrigation water. |

| |A whole farm budget is a great resource to present to your banker, landlord, a partner, etc. |

| |Most of your work should already be done if you have done a good job with your other budgets. As with the |

| |cash flow budget and enterprise budget, you need to look at your farm plans so you know quality and price of |

| |items included in you whole farm budget. See slide 16 for a planning outline. |

| |As with all the other budgets, we start with estimating our income and variable costs. These figures come |

| |from our enterprise budgets. |

| |Then we estimate our fixed costs. These may or may not come from the enterprise budgets as these costs are |

| |hard to calculate in an enterprise. They may also come from your income statement. This gives us our Net |

| |Farm Income. |

| |Once again ask for examples of income, variable and fixed costs. |

| |The instructor should be pelted with balls as this is repeat material from enterprise budget. |

| |For our whole farm budget we calculated by multiplying the income per unit by the number of units to be |

| |produced. Remember, for the enterprise budget we calculated this on a unit bases, now we are figuring our |

| |total enterprise income. Use all enterprises currently part of the farm and any enterprises you are looking |

| |at incorporating into the farm. |

| |Other income from custom work, off farm wages, tax refunds should be added in here as well. |

| |Calculated by multiplying the variable costs per unit by the number of units to be produced. Once again, we |

| |are not estimating on a per unit bases, but on the total amount of variable costs our enterprises will |

| |generate. Do this for all enterprises: The ones you are currently involved in and any new enterprises. |

| |Remember these are costs not already included in an enterprise, for example a loan for feeder calves would be|

| |included in the feeder calf enterprise budget and should not be duplicated here. Throw the ball repeat |

| |information about fixed costs. |

| |Add the variable and fixed expenses together to get total expenses |

| |Subtract the total expenses from the total income. |

| |Now you can analyses your whole operation and decide which enterprises to include, remove or adjust |

| |enterprise to better utilize capital assets such as land, equipment and water. |

| |For long-range budgets use long-term averages for prices and costs and use long-term averages for yields and |

| |production levels. |

| |Use your farm’s past records or for new enterprises, conservative estimates from research from you area |

| |usually available through the extension office. |

| |Over time, the whole farm budget may drop below the profit line in certain years. This is to be expected |

| |when major capital purchase are incurred or at the beginning of a new enterprise. Long-range planning will |

| |help prepare the manager for these years. Also, many events like the weather, government laws and market |

| |conditions can not be predicted, so the budget needs to be revisited and adjusted frequently. Actual and |

| |predicted budgets will not always a line for these reasons. |

|Objective 4 & 5 |As a final project. Have the students pair up as instructed in the interest approach (see below for ways to |

| |pair them up). Each set of students must build a budget. They must include enterprises from each other’s |

| |operations and collaborate on a set of goals. They need to include family living expenses. Any excess cash |

| |available after all farm capital purchase, new loans and living expense have been allocated must be spent on |

| |“toys”, travel, entertainment or charities, etc. They need to be specific about where this money is going. |

| |The pair must agree how to spend their excess cash. If there is no extra cash, allocate $10,000 to the |

| |students just for this purpose. It is important that the students learn to communicate and deal with |

| |conflicts that arise in the real world when dealing with people concerning money. They need to learn to be |

| |flexible as well as, learn the importance of helping others by supporting charities. |

| |Students can start project on paper, but it is recommended they use Excel. |

| |Step 1: List goals using S.M.A.R.T. technique. |

| |Step 2: List Incomes |

| |Step 3: List variable costs. |

| |Step 4: List fixed costs. |

| |Step 5: Estimate incomes and costs using farm planning techniques. |

| |Step 6: Project over a time period. |

| |Step 7: Calculate gross income, |

| |Step 8: Calculate return to labor. |

| |Step 9: Calculate profit/loss. |

| |Step 10: Allocate extra funds for entertainment and charities. |

| |PAIRING UP IDEAS |

| |Find a student who is wearing the same color socks as you. |

| |Find a student who’s favorite food is the same as you. |

| |Find a student who has eaten out at the same restaurants as you recently. |

| |Find a student who drives the same make and model of car. |

| |Choose a partner. |

| |I will choose a partner for you. |

| |Choose a partner of the opposite sex. |

| |You get the idea. You may want to have more then two to a group. |

|Objective 5: | |

|Review/Summary: |Have the students draw a map of all the budgets covered. Have them highlight the main points and parts of |

| |each budget, including goal planning, and name these stops on their map. Have them use different color |

| |markers, pencils or crayons to draw the map. |

|Application--Extended Classroom|See objective 4 & 5 |

|Activity: | |

|Application--FFA Activity: |Participate in the Farm Management CDE |

|Application--SAE Activity: | |

|Evaluation: |Students should use information from their own record books to complete the Excel worksheets that are |

| |attached. |

|Evaluation Answer Key: |Answers will vary |

|Other: | |

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