Farm investment analysis--hand-calculated comparative budgeting and computerized five-year transitional budgeting
Authors:   , Bogle T. Roy 
Published: May 2024

Tremendous capital investments required in today's modern farming necessitate prudent planning of future investments. The object of this research was to provide a systematic means of analyzing profitability and cash flow consequences, resulting from anticipated changes in farm investments. Two budgeting systems were developed. The first uses hand calculation to compare one or more alternative farm plans to a present system. The second is a computerized system to analyze the five-year transition of a selected farm plan. The two budgeting systems are quite different in purpose and design. The hand budgeting procedure was developed as a tool for long run planning in which the economic consequences of alternative plans for farm organization can be evaluated and compared, before committing resources to making adjustments. It was designed specifically to coincide rather closely with computer budgeting procedures currently available for long run planning. It provides a way of projecting the consequences of the "present system" of farm organization by applying selected crop and livestock enterprise standards which also are used in computing each alternative plan chosen for comparisons. In each case, computations are based upon some typical future year in which the plan is presumed to be implemented fully, with all changes and investments completed and with the projected performance levels of all enterprises fully achieved. The computerized farm investment analysis program was designed for an entirely different purpose. It provides a way of evaluating the expected performance of the selected long run farming system during each year of the developmental period. It is a transitional process which permits an analysis of the economic consequences of year- by-year adjustments or changes in assets, liabilities, net worth, cash flow, and other key measurements. Experience indicates that the most troublesome years in making major changes in a farming system are in the transition period-- the years when substantial major investments are made (and usually with borrowed capital) but also years in which the expected higher production and cash income have not yet been generated. This procedure is designed to help identify in advance some of the pitfalls and financial problems which may be encountered when changes are in progress. Since neither a farm operator nor any other professional can be expected to predict with complete accuracy the prices of crops and livestock, as well as prices of farm inputs, an additional feature was included in the computerized program. This unique feature provides for both crop and livestock prices to be increased and decreased by a predetermined percentage. The entire five-year transition budget is recalculated with the changed prices and key figures are printed out. This final step allows the operator to observe the possible consequences of a substantial up-swing or down-swing as it may effect farm profits, net worth and cash flow. In summary, the proposed hand budgeting system can be used in place of one of the many other farm planning budgets to select a particular long run farm plan. The computerized five-year transitional budget then is available to take the previously selected farm plan and analyze the farm profits, net worth, and cash flow for each of the five succeeding years, beginning with the present system.