Extension > Agriculture > Dairy Extension > Business tools and budgeting > Partial budgets
Partial budgets
September 24, 2011
This will be my final article for "U of M Dairy Connections" as I have decided to retire from Extension in January of 2012. As I look forward to a change in my future, I encourage you to consider something that should always be important for your future when you are considering making any changes to your farm operation. Many of you who have known me over the years may have heard me talk about partial budgets. A partial budget is a simple and very helpful tool to use when considering change. It can be used to analyze changing one thing such as purchasing a particular machine or for any other specific change being considered to your operation. The partial budget will help give you a determination as to the profitability of the specific change you are planning.
So what are the components of a partial budget? A partial budget can be broken into four distinct sections: increase of income, reduction of expense, income reduction, and additional expenses. Any specific change may provide:
- Increase of income - For instance, if you are thinking about going from 2X to 3X a day milkings, then you may want to anticipate an increase in milk production. How much more milk may be a moving target so it is wise to estimate conservatively.
- Reduction of expense – With any specific change there may be a reduction of expense. With the example of moving from 2X to 3X milkings per day, there may be some udder health benefits that could possibly reduce veterinary cost. There may be other reductions as well. Here again, a conservative estimate is prudent.
- Income reduction – Some specific changes may cause an income reduction. An example here is perhaps you have a few staph infected cows that should be considered culling. This would lead to some decrease in milk sales.
- Additional expenses – As with many specific changes, there often comes some additional expenses. If considering going from 2X to 3X milking, one may anticipate additional labor and feed costs. There probably will be other costs as well including more towels, more teat dip, and more sanitizer.
How do we do a partial budget? First, set up a sheet of paper into quadrants. The four quadrants may be labeled as such: 1) What are things that increase income? 2) What are the increased costs associated with the change? 3) Where will costs be reduced? 4) Where will income be reduced? (see Figure 1) Then proceed as follows: add up the positive impacts (increased income and reduced costs), add up the detracting impacts (increased costs and reduced income), then do the math. If the positive impacts outweigh the detractions, you now have a road map to give you a better idea of the financial impact of that particular change being considered.
Figure 1. Partial budget form example. |
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Proposed change: ________________________________________________ |
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Things that increase income |
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$ ________ |
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Things that reduce income |
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Things that decrease costs |
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$ ________ |
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Things the increase costs |
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$ ________ |
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Increase in net income (A) |
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$ ________ |
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Decrease in net income (B) |
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$ ________ |
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Change in net income (A-B) |
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$ ________ |
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In our world there will always be change. Change is constantly taking place in the dairy industry and on the dairy farm. Dairy producers are always faced with determining whether or not they should make a particular change and if it would be beneficial to the farm's profitability. What has been outlined in this article is a simple plan for developing a partial budget to use when considering a specific change so you can have a better idea and understanding as to the economic feasibility of the change. A partial budget format such as this is a tool that does not take a lot of time to use and will help you better manage change in the years ahead.
Best wishes and it has been a pleasure to serve you during my extension career.
