When operating a farm or business, there are many stressful financial decisions. Purchasing new equipment or land, hiring more employees and expanding or converting the operation are just a few hard decisions that an owner has to make.
A local example would be changing from a cow-calf operation to a grain farm. To make the process easier, two tools can be used to help analyze the situation, and then, make a financially smart decision. These tools are called an enterprise budget and an investment analysis.
Both of these are a great way to start before making a major financial decision. Enterprise budgets and investment analysis, along with other financial analysis tools, are taught in a farm management class at the University of Kentucky.
An enterprise budget is an estimate of the returns, costs and profits of an operation. Using simple formulas, an owner can find his returns over variable costs, which also determines the profit for land, labor, capital and management. Enterprise budgets are very helpful for figuring out the most profitable enterprise, comparing enterprises and providing data to decision makers.
In workshops that teach financial analysis, many owners believe that since they have been profitable in years before, they don’t need to use enterprise budgeting. With an enterprise budget, they are able to track where their money is coming from and how much profit they are truly making.
The enterprise budget is definitely useful for farmers that have a variety of crops or livestock. As an example, a producer that grows corn and raises cattle can see how much money is coming from each investment. After completing the enterprise budget, that farmer will be able to determine returns over costs from the corn and the cattle separately. The farmer then knows how to use the land for more corn, or purchasing more cattle.
An investment analysis is a very important tool when leaning towards purchasing equipment, land or livestock. Before spending any amount of money, it is good to know if the investment is worth the payment.
Often, a producer will purchase a new asset thinking that they made the best decision without any investment analysis. Bad investments can be costly, but also easily avoided. Some research and documenting are required to do an investment analysis, but worth the effort.
Farmers use a variety of equipment and because of time, expansion and certain tasks, purchasing more equipment is necessary. Questions arise when analyzing what equipment is the best to purchase. What is my budget? Should I buy used or new? Will it pay itself off in a certain amount of time?
A good example of using an investment analysis would be to look at a landscape business that is deciding whether to upgrade some equipment. Two 60-inch deck mowers are getting old and needing repairs. The owner wants to see if purchasing two new 72-inch deck mowers and selling his old ones would be a profitable decision.
To evaluate, the owner needs a list that includes the price of the new mowers and payments, amount that will be received for the old mowers, fuel economy difference, time saved with the larger deck, and cost of repairs/maintenance. After doing the investment analysis, the owner will be able to determine how much he/she would save by keeping the old mowers, or purchasing the new mowers.
Financial decisions can make or break a farm or business. There are budgeting, financial and investment tools that are designed to make smart financial decisions and the maximum amount of profit. Using a small amount of time and these tools can greatly benefit anyone making financial decisions.
You can find more information about financial decisions and other agricultural topics by visiting www2.ca.uky.edu/agcomm/pubs.asp.
Ben Mefford is from Frankfort and is studying agricultural economics at the University of Kentucky College of Agriculture, Food and Environment. Many extension agents begin as interns on the county level to learn what’s involved in the job and provide help in the office. Mefford has also been assisting in 4-H, Family and Consumer Science as well as in the KSU small farm program. He was one of the Farm-City Field Day presenters at the stop focusing on animal composting.