Budgeting in Agriculture Product Industries
Budgeting is an invaluable tool for farm managers in the agriculture business. Each and every business should use budgets to project how profitable an enterprise may be or to analyze existing enterprises.
In Agriculture businesses, some decisions have vital consequences while others are not as crucial. Some such as purchasing capital equipment, occur infrequently. The choices made today may have an immediate impact or they may take a much longer time to impact on agriculture business. With the help of budgeting we can analyze our business well and plan it accordingly.
Enterprise budget is a financial management tool which is used to analyze project implementation, running costs and returns for an activity.
Budgets represent the estimates of the income, costs and profit associated with the agriculture business. The information that is contained through the budgeting is used by agricultural producers, extension specialists, financial institutions, government agencies and other advisers as well to make the decision for the future business.
Budgeting of agriculture business are used to:
- To count the income received from an enterprise
- To evaluate the efficiency of agriculture business
- To analyze the estimate benefits and costs for major changes in production practices
- To Provide the basis for a total business plan
Enterprise Planning and Financial Management
Enterprise budget is used to estimate the costs and receipts (income) associated with the production of a specific agricultural product.
Enterprise budgets can also be used in projected cash flow budgets to estimate seasonal cash inflows and outflows and borrowing needs for your agricultural operation.
Cash flow budgets are forward-planning tools and it contains the estimation of the cash flows for future in agriculture business. Generally it is used on monthly cash flow but it also can be used as for annual planning.
Annual cash flow helps you to track important cash outflow demands such as farm business expenses, debt payments, taxes, family living expenses, etc.) and match them with cash inflows in a given period (e.g., sales, loans, new investment, and government payments.
Partial budgeting is a planning and decision making framework used to analyze and compare the costs and benefits of alternative management decisions faced by agricultural industries.
Partial budgeting focuses only on the changes in income and expenses. It allows you to get a better handle on how a decision will affect the profitability of your business.
When and How to Use Partial Budgets
Partial budgeting is the evaluation of the impact on business profit resulting from proposed management change. It also can be used to analyze the number of important business decisions including:
- Choose to take up new production technology
- Changes in enterprises
- Adding enterprise in the existing system
- Machinery on leasing apart from buying
- Updating the production practices
Partial budgeting does not account for the changes in the value after a certain period of time that’s why we use Capital Budgeting approach. The Capital budgeting approach is used when you need to focus on the effects that occur more than a year or two in the future.
Hope this article was helpful for you to know how the budgeting is important in agricultural industries. If you have found this article helpful and worthy then do share it with your other friends and circle too.