Do a partial budget
A partial budget is used to calculate the financial effect of a proposed change to one aspect of your business.
This will help to predict the additional output from making a new investment and will offset all of the costs associated with it. The result will indicate the effect on the level of profit (or loss) from making such a business change.
The type of changes you can test might be:
- Moving from home-rearing heifers to contact-reared
- Making forage yourself to using a contractor
- Moving from set stocking to paddock grazing
- Moving to a no-till system
- Implementing a SmartHort automated solution
If we took the example of the farm business looking at changing from home-rearing heifers to contracting out the rearing, we can use the partial budget to look at the cost savings associated with labour, feed, provision of housing and bedding which will all be significantly reduced; the potential income from the extra milk from the additional cows that can now be housed; and compare this against the extra cost of paying the contract rearer.
By budgeting these savings and proposed costs, it is possible to assess whether the planned change is financially viable. Of course, there may be other benefits of a change to the business that are not financially related and these need to be taken into account, but the partial budget is the first consideration when assessing such changes.
The partial budget should include the projected extra revenue, in the case of a capital investment, and this figure can be used to calculate payback time and expected return on investment.
A simple means of setting out a partial budget is available here: