In the October 2009 issue of AgFocus, a common theme among Jerry's and Collin's articles was the value of measuring outcomes or expected outcomes when managing a farm business. The words of wisdom "If you can't measure it, then you can't manage it" are used many times in articles and presentations to make a case for the value of measuring financial condition and performance of a farm business, especially during planning efforts as the farm owner tries to answer the following questions like, Where is the business now? Where do you want it to be? and How will you get it there?

Answering the last question requires measuring expected effects of possible changes -- for example, the expected change in profit -- and selecting the best or set of changes for implementation. Jerry talks about improving results via "better feed efficiency, better forages, tightening up reproductive programs and reducing transition cow metabolic problems and culls." Collin mentions "tweaking feed rations, calving procedures, and training or retraining employees" as means to achieving improved results. Which possible change or set of changes makes the most sense given financial and personal objectives that direct the business, and given the resources available? The producer can use a partial budget to measure the expected financial effects associated with possible changes to the farm business to help answer the question.

THE PARTIAL BUDGET

Definition
A projection of the expected change in some financial measure - profit and cash available among others -- associated with a proposed change in the farm business.

Characteristics

• Analyzes a proposed change compared to the present farm business.
• Includes only the changes in income and costs not the total values - a type of marginal analysis.
• Provides an estimate of the increase or decrease in profit or cash available.
• Says nothing about the change relative to alternative uses of resources.
• Analyzes changes such as, enterprise substitution, input substitution or level, changes in practices and changes in the size or scale of operation

Partial Budget Format
A format for a partial budget that estimates the expected change in profit as the change in the total value of production minus the change in costs follows.

See PDF table 1: Partial Budge Format

An Example
To install mattresses in 50 tie stalls would cost $3,250. The mattresses cost $65 each, including installation labor and additional labor to manage cows while mattresses are being installed. The dairy wants a 5 percent rate of return on the average investment before inflation and taxes annually. Assume the mattresses last five years with zero salvage value. Bedding costs are projected to drop 50 percent. Due to improved cow comfort and lower stress, milk production increases 1 pound per cow per day. The milk, in this example, has a value of $7 per hundredweight after deducting milk marketing and feed costs. All other costs remain the same. If the assumptions hold true, then installing mattresses on this dairy can be expected to increase profit by $2,046.25 annually. Here’s how the owner of a 50 cow dairy developed a profit partial budget to determine whether stall mattresses would be a good investment.

See PDF table 2 example


Measuring Expected Changes in Profit Using a Partial Budget (pdf; 323KB)