Farm Transition Planning

Enterprise budgets are powerful management tools for farms and agribusinesses. An enterprise budget is an organized list of all the revenues and expenses related to a specific aspect of a business. For example, a dairy farm might have en enterprise budget for each ofthe following enterprises: the milking herd, dry cows & replacement heifers, corn silage, alfalfa hay, and pasture. These budgets help a manager develop a feasible production plan for the business, as well as estimate the profitability for each aspect of the overall operation.

An enterprise budget is typically separated into three sections: Revenues, Variable (or Operating) Expenses, and Fixed (or Ownership) Expenses. This format allows a manager to examine short run and long run decisions, breakeven analysis, and profitability of the enterprise.

The Revenue section lists all of the potential revenues (or value of production) for that specific enterprise. For example, a feeder lamb operation might list revenues from the sale of the feeder lambs, cull ewes and rams, and wool. A corn enterprise budget might list revenues from the sale of corn grain, as well as the sale of baled stover.

Variable (or Operating) expenses are the outlays for operating inputs such as feed, seed, fertilizer, fuel, repairs, and hired labor. These are the inputs over which the manager has complete control in the short run. Typically, the variable expense section includes an estimate of the opportunity cost of the funds that are "tied up" in the operating inputs. We call this "interest on operating capital".

Fixed (or Ownership) expenses are the expenses related to the fixed assets necessary to produce that specific enterprise (land, machinery & equipment, breeding livestock, and owner labor/management). These expenses typically include depreciation, forgone interest, and other overhead expenses (property taxes, insurance premiums, etc.) attributable to that enterprise.

Enterprise budgets can be used to estimate the short run and long run profitability on an enterprise. Short run profitability is called "return above variable costs", while long run profitability is called "return above total costs". Enterprise budgets can also be used for sensitivity analysis - primarily breakeven analysis - that helps a manager understand the level of performance (yield, price, etc.) necessary for the enterprise to be profitable.

Budgets for enterprises common to Virginia may be found at the Virginia Cooperative Extension website. These budgets represent average yields, prices, costs, and production practices for farms across Virginia. Use the "Your Farm" column to customize these budgets to fit your specfiic operation. Here are links to the VCE enterprise budgets:

Crop Budgets

Livestock Budgets

Horticultural Budgets (currently being updated)