At a recent conference for farm Chief Executive Officers (CEO), I encountered an interesting question. One of the attending livestock producers asked if they should separate out finances and records for the grain side of the operation or keep them combined with the livestock records. Especially during an economic reset, more businesses tend to diversify their operations, which makes this is an excellent observation and question.
In strong economic cycles, many farms keep a total budget or what is sometimes called “global financial results.” While this may not be an ideal management practice during profitable times, it certainly is not a prudent practice during economic challenges. In fact, with today’s tight margins and increased volatility, a good case can be made for separate enterprise budgets.
One of the differentiating factors among top producers is an understanding of their cost of production. This metric is essential to profitability and requires good records for each enterprise. In short, the answer is yes, it is important to develop separate enterprise budgets, both for the crop and the livestock side of the business. This tool is extremely useful in scenario analysis and projected profit, loss and cash flow for both enterprises. Often, these budgets are critical in land rent negotiations, resource allocation and determining the inputs needed for optimal production output.
Next, enterprise budgets can aide a great deal in determining which part of the business is most profitable, most expensive or bears the most impact on other parts of the business.
Another powerful part of an enterprise budget is the perspective it can provide on priorities and resources. Allocating capital, labor and resources most efficiently can be difficult without good information on which to base one’s decisions. Economically, this is often called “opportunity cost.” In other words, it is important to identify any potential impact on one enterprise from deploying assets in another; because often, determining the best use of a specific resource involves weighing risk to other areas.
P.S. When conducting enterprise analysis, the variable costs can be quite easily be allocated for each of the enterprises. Many find it difficult to determine which and what percent of the fixed costs should be assigned to each part of the business. Well, try a broader perspective. In other words, if you get caught up in perfection, it is likely you will not complete this task. For instance, fixed cost on equipment might be assigned at 80 percent to grain and 20 percent to livestock. A ballpark estimate is all it takes for enterprise analysis to be a useful tool, so avoid the temptation to be too specific or exact.
Point to Ponder
Many University extension programs have enterprise budgets that can be modified to your specific farm business situation. In my recent travels, I met a West Coast producer that hired a college student intern to develop enterprise budgets under the guidance of the professors. The result was a great exercise for the intern and the college class, as well as a useful tool for the producer. It was a win-win situation!