Budgeting techniques

Now we tum to the crux of the decision process - the choice between alternatives. The purpose of this chapter is to show how choices can be made systematically so that the selections made are more likely to prove successful, even when risk is involved.

We can identify two broad types of change - simple and ‘complex'. Simple changes involve, for instance, deciding whether to replace tomatoes with beans, or changing over from producing eggs to poultry for eating. In the case of the ‘complex’ change, extra capital investment is involved. Examples of such a change are putting in a well and pump for irrigation, cIearingextra bush land or buying machinery. Usually, it takes several years before the new plan is working properly and reaches a regular pattern of costs and receipts, called the ‘steady state'.

Both situations are described here. Where a simple change is contemplated, it is not necessary to go through all the steps suggested. Before a farmer/or his adviser can make a choice between two or more alternative farm plans, they need to know how the plans compare in terms of ‘profitability'. If some small adjustment to the present farm organisation is being proposed, the structure and arithmetic of the budget will be very simple. On the other hand, if a complete reorganisation of the farm business is under consideration, the budget may involve many calculations.

Some basics

The first need in preparing reliable budgets is a sound knowledge of the technical aspects of agriculture and of the circumstances of the individual farm. It is no use dreaming up numbers to put in the budget and then expecting the answer to mean anything. Relevant, simple farm records can sometimes be a help in quantifying the present position with regard to the use of inputs or labour, machinery, fuel, seed, fertiliser, feed, and so on, in relation to the levels of output of crops and livestock of the present systems. This information will need to be supplemented with technical data from other sources such as neighbouring farms and experimental stations, and with the observations of an experienced extension worker. Then estimates must be made ofthe input and product prices which are expected to apply to the future planning period.

Changes in farm activities usually have a major impact on costs and there will be changes in the composition of the gross income.