Cornhusker Economics: Using Partial Budgets to Examine Incremental Ag Business Changes
Business owners must often make decisions about changes for their agricultural businesses. Many of the decisions are incremental, such as adding land, expanding or reducing, or adding or changing how an enterprise is managed. Analyzing how the whole farm is impacted by these types of changes is unnecessary. The partial budget is a useful analytical tool for agricultural managers, operators, owners, and investors when these situations arise.
A partial budget helps agricultural owners/managers evaluate the financial effect of incremental changes. A partial budget only includes those resources that will be changed; it does not consider the resources in the business that are left unchanged. It is important to remember that only the change under consideration is evaluated for its ability to increase or decrease income in the agricultural business. Including costs or income outside the scope of the proposed change is not part of partial budget analysis and should be disregarded.
Partial Budgeting Principles
Partial budgets are based on the principle that small agricultural business changes have effects in one or more of the following areas
- Increased income
- Reduction or elimination of costs
- Increased costs
- Reduction or elimination of income
The net impact of these effects is the positive financial changes minus the negative financial changes. A positive net indicates an increase in net agricultural income due to the change, while a negative net indicates the change will reduce net income.
Partial Budget Components
A partial budget consists of two columns, a subtotal for each column and a total gain or loss calculation. The left hand column contains those items that increase income while the right hand column contains those items that reduce income in the business. Table 1 illustrates the use of the partial budget for purchased versus raised beef replacements. In this example income increases come from the sales of heifer calves, reduced cost (feed and pasture) and reduced operating costs. Increased costs come from the purchase of replacement heifers.
Continue reading at Cornhusker Economics