By Russell Phenicie, Penn State Extension, Franklin County
Creating a budget can be a valuable experience not only for folks who are raising crops or livestock for profit, but also those who are homesteading. No matter the scale of your operation, knowing your costs and potential income will be valuable tools in making future decisions.
Why create an enterprise budget? Use of an enterprise budget has several benefits. One is that it enables us to create simulations to show potential scenarios and outcomes of individual enterprises. This is cheaper to do on paper with a budget than after crops are planted or animals are purchased. Doing this you can use the budget to create a roadmap for your production. Focusing and refining your production plan to identify potential hidden costs that may have otherwise been forgotten until it is too late. Use of a budget also enables you to put your plans into fileable form that you can reference later to identify the areas where you may have over or underestimated costs or income. Perhaps most importantly, utilizing an enterprise budget will enable you to know your costs of production. If you do not know your costs of production, it is impossible to know what price you need to charge for your product. Just because your neighbor is selling a product at a certain price does not guarantee that you will be profitable at the same price.
Enterprise Budgets Components
An enterprise budget can be broken into three main components. The first part is referred to as income or receipts. This part of the budget shows the products in units that will generate revenue from the enterprise such as dozens of eggs, bushels of corn, or pounds of product. In this section, you will estimate the quantity of units produced and expected price per unit. It is important that these numbers are an honest estimate that is representative of 3 out of 5 years. While numbers from outlier years can be used for best/worst case scenarios, they should not be used for normal budgeting purposes as they are not average and will skew your expectations. The basic formula for this part of the budget is Income = Quantity produced x Unit price.
The second part of an enterprise budget consists of variable cost, often also referred to as operating costs.