Chapter 4

Farm Planning and Budgeting

Farm Planning
Farm planning is the deliberate and conscious effort on the part of the farmer or farm manager. It
helps him/her to think about the farm programs in advance and adjust them according to new
knowledge on technological developments, challenges, price structure, etc. A farm organization
can succeed in effective utilization of resources when its management decides in advance of its
objectives, and method of achieving them. Without planning and coordinated effort of the
management, the outcome of any business activities becomes wastage of resources.
Definitions:-Farm planning can be defined in different ways.
1. Farm planning is a basic but complex management function combining financial,
physical and technical aspects of the farm for selecting and developing the best of the
alternative way of achieving the stated objectives.
2. Farm planning is an integrated, coordinated and advance program of actions, which seek
to present an opportunity to cultivators to improve his level of income.
3. Farm planning is a basic management function that involves selecting a particular
strategy or course of action among alternative courses of action with the objective of
obtaining the greatest satisfaction of the firm`s goals.
4. Farm planning is a process to allocate the scarce resources of the farm and to organize the
farm production in such a way that to increase the resource use efficiency, the production
and the income of the farmer.
In general, it is an approach, which introduces desirable changes in farm organization and
operations and make the farm viable unit by making rational decision regarding the
organization and operation of a farm business. It tells how best to make use of opportunities
to a farmer to chanalize his scarce resources. The opportunities go on increasing, their
relative economic goes on changing, so planning has to be done in a continuous fashion.
Planning is also organizing, as a plan represents a particular way of combining or organizing
resources to produce some combination and quantity of agricultural products.
A farm plan contains the usual adage of “what, how much, when, where, who, and how” of a
situation.
Objectives of Farm Planning
On the majority of our farms, there is underutilization as well as over utilization of the
existing farm resources. Due to this, usually farm organizations fail to get maximum net gain.
This indicates the need for reorganize the farm structure for proper allocation of resources to
obtain optimum production and net income. This calls for proper planning activity.
Farmers may have some personal preferences and motivations that must be taken care of in
practical planning, which may includes maximizing security, minimizing risk, etc. However,
the main objective of farm planning is the improvement in the standard of living of the
farmer and its immediate goal is to get the greatest return in terms of cash and food, for his
effort both in the short run and long run.
Importance of farm planning
Without planning, farm business decision would become random, ad hoc choices. Some of
the advantages of farm planning are:-
1. Income improvement –farm planning primarily concerned with making choices and
decisions: selecting the most profitable alternative from all possible alternatives and
seek to present an opportunity to cultivators to improve his level of income. It is this
opportunity of income maximization that induces farmers to adopt desirable changes.
Such income maximization could be achieved from a given bundle of resources by
reorganizing present type of production as well as introducing changes in technology.
2. Focuses attention on the farm organization`s goals. Farm planning helps the
manager to focus on the organization`s goals and activities. This makes it easier to
apply and coordinate the resources of the farm more effectively. The whole
organization is forced to embrace identical goals and participate in achieving them. It
also enables the farm manager to outline in advance an orderly sequence of steps for
the realization of organization`s goals and to avoid a needless overlapping of activities.
3. Educational tool/process- farm planning is an educational tool to bring about a
change in the outlook of the cultivators and the extension workers. Knowledge of the
latest technological advances in agriculture is a prerequisite for better farm planning;
so farmers of farm managers keep their information up-to-date through this forced
action situation of farm planning process. This acts as self-educating tool for the
 farmers. The farmers or farm managers can closely study their own business and see
more clearly their opportunities and limitations, thus, improving their managerial
ability.
4. Desirable organizational change- planning helps to introduce desirable changes in
farm organizations and operations and also it makes the farm a viable unit. In its broad
sense, it may mean any contemplated change in the method or practices followed on
the farm. The advantage of farm planning lies in its treating the farm as an operational
unit and tailoring the recommendation to fit into the individual farmer`s opportunities,
limitations, problems and resource position.
5. Minimizes risk and uncertainty-by providing a more rational and fact based
procedure for making decision, farm planning allows managers and organizations to
minimize risk and uncertainty.
6. Facilitates control-in planning, the farm manager gets goals and develops plan to
accomplish these goals. These goals and plans then become standards or benchmarks
against which performance can be measured. The function of control is to ensure that
the activities confirm to the plans. Thus, control can be exercised only if there are
plans.
Basically, farm planning helps the cultivators do the following things in an organized,
systematic and effective way.
a. It helps to identify problems faced by all farmers or managers.
b. It forces farmers to define specific objectives.
c. It helps him to examine carefully his existing resource situation and past experiences
as a basis for deciding which of the new alternative enterprises and methods fit his
situation the best.
d. It forces farmers to think forward systematically.
e. It defines responsibility :( defines who does what).
f. Effective communication :( between workers)
g. Within the new farm work mew ideas and opportunities and his own resources
position, it helps him to make rational decision on what to do.
h. It helps him to identify clearly the various supply needs for alternative improved plan.
i. It helps to find out the credit needs, any of the new plans.
j. It gives him an idea of the expected income after paying off his loans, etc.

Basic steps in farm planning

To develop an optimum farm plan the following steps are important.
1. Inventory of farm resources –prepare a complete list of the farm resources which
limit the size of the different farm enterprises; such as land, labor, animal,
buildings, machinery and liquid capital, etc. this helps for assessment of actual
resource limitations and production capabilities of the farm. To these resources,
possibilities of hiring or borrowing are added. These restrictions lay down a
framework, within which a farm is considered.
2. Analysis of the existing farm plan-obtain full information on how each resource is
being utilized and what are the outputs obtained from various enterprises adopted
on the farm. In other words, examine the present plan followed by the cultivators,
for its costs (variable or fixed) and returns (gross income) and resource use pattern.
3. Identification of the weakness of the present plan-a careful analysis of resource
use in the existing plan will throw up the imbalances. The various weaknesses in the
existing plan will act as a guide line for bringing about improvements in the
alternative plan. Example, relatively more area under less profitable crop of low
level of use of yield increasing technology, etc.
4. List out the risks of production on the farm-make a list of all such risks involved
in agricultural production on that particular farm and bear in mind in developing the
alternative plan. To the extent possible, provide for effective steps for eliminating
or reducing such risks.
5. Forecasting- in order to decide where one wants to go, it is necessary to have
information about what the future will look like. Planning is deciding what is to be
done in the future against established background of the estimated future facts.
Thus, although the future is full of uncertainties, the manager must make certain
assumptions about it in order to plan properly. These assumptions are based on
forecast of the future.
6. Establish objectives- the next step in planning is to establish objectives for the
farm organization and for each enterprise. Objectives specify the expected results
 and indicate the end points of what is to be done, where the primary emphasis is to
be placed, and what is to be accomplished by the management.
7. Prepare the alternative plans- there may be a number of alternative plans suiting
the situation of a given farm organization. Within the framework of resource
restrictions and keeping in view the weakness of the existing plan and the
possibilities of incorporating modern technology, a few alternative farm plans may
be developed. Alternative plans can be worked out which may vary in the amount
of risk involved, labor requirements and other features as well as probable net
income.
8. Analysis and selection of the final plan- ideally, we should evaluate alternative
plans on various points such as probable income, amount of risk involved, labor and
capital requirements, etc. The farm manager should select the final plan for his farm
which he fells will give him and his family the highest level of satisfaction in
respect of these and other variables.
Farm Budgeting
Farm budgeting is a method of analyzing plans for the use of agricultural resources at the
command of the decision maker. Farm budgeting is a statement giving an estimate of all the
farm receipts(income) collected and expenses(costs) to be incurred for the agricultural year. It
is the expression of a farm plan in monetary terms by estimation of receipts, expenses and net
income of a farm or a particular enterprise. Budgeting is a very simple and straight forward
exercise, which can be used to select the most profitable plan among a number of alternatives
and used to test the profitability of any proposed change (possible adjustment) in plan.
It is a way `try it out paper` before a plan or a proposed change in a plan is implemented.
Basically, budgeting involves two steps.
1. Preparation of description and specification of the proposed plans (i.e all activities, inputs and
outputs).
2. Estimation of the expected cost and returns.
Types of Budgeting
There are different types of budgeting, each of which is adapted to a particular size, purpose and
type of planning problems. The three basic types are partial budgeting, enterprise budgeting and
whole farm (complete) budgeting.
Whole farm budgeting involves profitability for the entire farm business while partial budgeting
and enterprise budgeting are used to analyze only a part of the whole farm.

Partial Budgeting
It is the method of making a comparative study of costs and returns analysis resulting from a
small change or possible adjustment in the part of farm plan. It is an estimate of the profitability
of the farm resulting from a small change or possible adjustment in the part of farm plan. Partial
budgeting considers only those items of income and expenses which are affected (changed) by
the proposed adjustment in the plan. Those income and expenses that are unaffected by the
proposed change are excluded from the calculation.
A partial budgeting can be compiled more quickly and easily than the other types of budgeting
since it is only concerned with those cost and returns that are to be changed.
In general, a partial budget is used to estimate the effect of changes in the farm operations. A
partial budget usually prepared to ascertain the effect on the net benefit of the farm due to small
change in the farm plan such as:
 Substituting one enterprise for another without any change in the entire farm land area.
Example substituting 1ha of soybean for 1 ha of maize
 Changing indifferent level of a single technology. Example estimating the change on the
net benefit of changing from one level of nitrogen fertilizer application to another in
maize production.
 Changing to different technology (ies). Example changing from hand weeding to
herbicide use of weed control.
The format used to compute partial budgeting.
Gain Cost
a. Additional income d. Reduced income
b. Reduced expense e. Additional expense
c. Total gain(a+b) f. Total expense(d+e)
Net change/ net gain/ profit (c-f)

There are two plans: the base plan and the alternative/proposed plan.
Additional income: - those incomes that would occur with the proposed plan but would not
result from using the base plan.
Reduced expense: - those savings in expenses. It is the expense of the base plan that will no
longer be incurred with the alternative plan.
Reduced income: - those return of the base plan that will no longer be received after the change
has been made.
Additional expenses:-those expenses of the proposed plan that are not part of the base plan.
Net change: - indicates the profitability of the proposed plan.
If the difference is positive the proposed plan is more profitable than the base plan.
If the difference is negative the base plan is more profitable than the proposed plan.
Example: a farmer has observed that the expected wheat price for the coming year appears to be
somewhat more favorable than the projected maize price. Based on this information, the farmer
is considering decreasing his maize production by 40 hectare and increases his wheat production
by the same amount. Additional information: the farmer can produce 14 quintal of wheat and 18
quintal of maize per hectare. The farmer needs to use 3 quintal of wheat and 5 quintals of seed
per hectare. The farmer needs to hire 41 and 47 hours of labor per hectare for wheat and maize
respectively. The price of wheat and maize per hectare is birr 170 and birr 140 respectively. The
cost of wheat seed and maize seed per quintal is birr 182.2 and 146.8 respectively. The cost of
labor per quintal is birr 4.25 for wheat and maize production. Determine the profitability of the
proposed plan.
Solution:
Gain Cost
a. Additional income d. Reduced income
(increased wheat income) (loss of maize income)
14qt/ha*170Br/qt*40ha=95200Br 18qt/ha*140Br/qt*40ha=100800Br
b. Reduced expense e. Additional expense
(reduced maize cost) (additional wheat cost)
5qt/ha*146.8Br/ha*40ha=29360Br 3qt/ha*182.2Br/qt*40ha=218Br
47qt/ha*4.25Br/hr*40ha=7990Br 41hr/ha*4.25Br/ha*40ha=6970Br
c. Total gain(a+b)=Br 132550 f. Total
expense(d+e)=Br129634
Net gain (c-f)=132550-129634=Br 2916
Since the difference (net gain) is positive the proposed plan, substituting 40ha of maize land to
wheat production, is more profitable than the base plan.
Differences of partial budgeting from other techniques
In partial budgeting one or more enterprises might be considered while enterprise budget is
prepared for a single enterprise.
Partial budgeting is used to examine the profitability of possible adjustment in the farm plan
while the whole farm budget estimates the profitability of the entire farm plan.
Partial budgeting is not suitable for preparing a plan for the whole farm; there, intermediate in
scope between enterprises and whole farm budgeting.
In partial budgeting, the items of income and expenses that will not change are ignored but in the
enterprise and complete budgeting the total values are included.
Partial budgeting is relatively simple and more applicable.
Enterprise Budgeting
Enterprise is defined as a single crop or livestock commodity being produced on a farm and most
farms consist of a combination of several enterprises. An enterprise budgeting is a listing of
estimated income and expenses associated with a specific enterprise to provide an estimate of its
profitability.
Each enterprise budget is developed on the bases of a small common unit such as one hectare for
crops or one head of livestock, which permit easier comparison of the profit for alternative and
competing enterprises.
The primary purpose of an enterprise budgeting is to aid in selection of inputs and enterprises
consistent with the resources available. It also aid to select combination(s) of enterprises that will
increase income from the farm business so that it can be included in the whole farm plan because
a whole farm plan often consists of several enterprises.
Several kinds of data are necessary for budgeting, which includes:
 Physical input data(both variable and fixed inputs)
 Field out put data (both main products and by-products)
 Price data for all inputs and outputs
Format used to construct an Enterprise Budget
Although, no single organization or structure is used by everyone, enterprise budgets
contain three parts: income, variable/operating costs and fixed costs.
No. Item Unit Quantity Unit Price Value/ha
1. Income/revenue
Main product--------- Qt
By-product----------- Qt
Total revenue ------- Birr
 2. Variable costs
Seed/feed--------------- Qt
Fertilizer/chemical----- Kg/Lt
Machinery expense
 fuel,oil----- Birr
 repair -------- Birr
Labor-------------------- Birr
Others ------------------- Birr
Total variable costs Birr
Gross margin(1-2)----- Birr
3. Fixed costs
Depreciation on:
 machineries------ Birr
 buldings----------- Birr
Interst on investment--- Birr
Tax and insurance------- Birr
Land charge-------------- Birr
Total fixed cost-------- Birr
4. Toal cost(2+3)----- Birr

5. Estimated profit(1-4)---- Birr

Steps in enterprise budgeting

1. Estimate the total production and the expected output prices. Both of these values
will have a great effect on enterprise profitability and they should be carefully
estimated.
2. Calculate the variable costs: variable costs such as seed, fertilizer and chemicals can
be easily estimated if the quantity and input prices are obtained. But, such variable
costs like fuel, oil, repair and labor are more difficult to estimate for a particular
enterprise. These costs depend on machinery type, size and the number of tillage
operations to be performed. Records of several years and enterprise analysis are good
sources of information.
3. Calculate fixed costs: costs such as costs for land, buildings, machinery, etc also
must be prorated to the specific enterprise on per hectare base. The amount of these
fixed costs, except land, depends on depreciation cost of that input.
Depreciation: is the financial estimate of the annual loss of value of capital equipment
due to wear and tear over its useful life used in production. Depreciation can be computed
using different methods: straight line method, declining balance method, sum of the
year`s digits method, etc.
Break-even Analysis
An enterprise budget can be used to perform a break even analysis for either price or
yield or both. Break even analysis is needed when, for example, there is a great
 uncertainty about the level of yield to be expected from a crop to be produced which
has no previously been grown. In this case, the ordinary partial budgeting can not be
used, rather break budgeting can be employed to estimate the yield required to
provide an exact balance of changes in cost and revenue, so that the farmer is neither
better nor worse off.
Break-even yield-is the yield which is necessary to just cover all costs at a given
Total Cost
output price. Break-even yield=
Output Price
Break-even price-is the price necessary to cover all costs at a given yield level.
Total Cost
Break-even price =
Expected Yield
Example: an enterprise budget for sorgum production shows a yield of 20 quintal
hectare , a selling price of 5 birr per kg and total cost of birr 5000 per hectare.
5000birr /ha
Break-even yield= =1000 kg/ha =10 qt/ha
5 birr /kg
5000birr /ha
Break-even price = =250 birr/qt
20 qt/ha
Complete Budgeting
The whole farm budgeting is a summary of the expected income, expenses and profit for
a given farm. It considers the cost and returns of all the crop and livestock enterprises in
order to derive the net return of the whole farm. It is just the horizontal sum of enterprise
budgets.
Steps in complete budgeting
i. Preparing a plan that includes the area of each crop, the number of each class of
livestock and the production methods. The proposed plan is based on subjective
judgment, experience and intuition coupled with technical considerations. For example,
an agronomist may have suggested a new crop rotation or a livestock specialist may have
suggested the introduction of a goat enterprise. Thus, several alternative plans may be
prepared.
ii. Budgeting the expected costs, including common costs, and returns to financially
evaluate each plan, and find which is the best in terms of expected net farm income.
 The format used in computing complete budgeting
No. Items/Descriptions Total
values
1. Income / revenue
Wheat -------------------------- x
Milk ---------------------------- x
Cotton-------------------------- x
Total income ----------------- xx
2. Variable costs
Seed/feed---------------------- x
Fertilizer/chemical----------- x
Fuel,oil,repair---------------- x
Labor ------------------------- x
Others costs ----------------- x
Total variable expenses---- xx
Gross margin(1-2)------------ xx
3. Fixed expenses
Property taxes & insurance----- x
Interest on debt------------------- x
Depreciation costs--------------- x
Others ---------------------------- x
Total fixed expenses ----------- xx
4. Total expense (2+3)------------ xx
5. Net farm income (1-4)--------- xx

Uses of complete budgeting

In addition to providing an estimate of net farm income, a whole farm budgeting has several
potential uses such as:
 It provides a basis for comparing alternative plans for profitability. This can be
particularly useful when planning for growth and expansion.
 The cash expenses in the whole farm budgeting provide an estimate of the operating
capital the business will need during the year.
 A detailed whole farm budget showing the estimated profit can be used to help
establish credit and borrow the necessary operating capital.
 The worksheets used to prepare the budget contain estimates of total input
requirements. Orders for inputs such as fertilizer, seed, chemicals, and feed can be
placed using this information.
 It is often used in situations where it is realized that the proposed adjustments in the
business will have an impact on several aspects of the business operations because of
the interrelationships that exist between different enterprises.
 It is useful for someone who is planning to enter in to farming business to have an idea
of the profitability of the particular farm.
 For a farmer who is planning to reorganize his farm or switch entirely to new forms of
farming organization may find complete budgeting useful to estimate the net return or
profit of the business.