AFM 302 Farm Plan and Budget 012441

AFM 302: FARM PLANNING AND FARM BUDGETING
1. Farm Planning
Farm planning can be defined as the preparation of an operational programme for a farm which
will ensure the consecration of land and other resources and the efficient use of production factors,
thereby increasing the net income and satisfaction of the farmers. In the past, the belief was that
planning was not required in traditional farming because farmers mainly practiced the
farming/agriculture which is suited to the soil type and that have stood the test of time. This is
however no longer tenable. As new technologies are introduced, there is the need to combine
available resources to achieve higher profits.
Farm plans are particularly required when there are limiting factors such as land, labour and capital
and the aim is to maximize returns to the limiting factors.
Planning is a process of thinking in advance about the best alternative action. It is a process of
thinking in advance, what to do, when to do it, how to do it and where to do it in order to achieve
stated objectives.
Types of Planning
a. Short-term planning b. Medium-term planning c. Long-term planning
Aims of Planning
1. To achieve the set goals/objectives 5. For credit and taxation purposes
2. For expansion and growth 6. To avoid risks and uncertainties
3. To maximize profit 7. For control and coordination.
4. To minimize cost
Methods of Farm Planning
a. Budgeting b. Programme Planning c. Linear Programming
Farm Budget
Farm budget is defined as the detailed quantitative statement of a farm plan, or a change in farm
plan and the forecast of its financial result. A budget sets out two things:
a. the physical aspects of the plan – what to produce, how much and the resources needed
b. the financial aspects of the plan – the expected costs and returns and therefore, the profit.
Types of Budgeting
a. Complete Budgeting b. Partial Budgeting c. Break-even Budgeting
a. Complete Budgeting
This is carried out when total reorganization is desired or needed. It is usually carried out for a
new farmer just starting a farm or when technologies and methods of production have changed or
when the size of the farm has increased or whenever any other force outmodes the existing farm
organization. See Table 1.
Once a long-run budget is prepared, it provides the framework within which a short-run or a year-
to-year plan is developed. The budget for a year may be worked out in detail or may be used to
compare those alternatives which appear to need adjustments in terms of the outlook for the
coming year.
Steps in Making a Farm Budget

To achieve a meaningful plan, the steps listed below should be followed:
1. Determine farming goals and farmers’ preferences;
2. List the farm resources available to the farmer;
3. Determine which of the resources are currently being used;
4. List the gross production
5. Prepare a statement of expenditure and income for the farm on the basis of current
utilization of the farm resources;
6. Analyze the input-output relationships such as labour and/or machine performance or
efficiency attained on the farm;
7. Compare the above with the standards available on other farms around the area.;
8. Diagnose weaknesses – both structural and operational
9. Determine priorities in correcting the structural and operational weaknesses;
10. Prepare a number of alternative farm plans and choose one as the final plan to be adopted;
11. Supervise the implementation of the programme under the plan
12. Evaluate the results.
Table 1: A Complete Farm Budget for Mr. Ajasa on a Five Hectare Farm
Gross margins
Crops Hectare Naira
Yam 1.0 50,000
Maize 1.0 35,000
Cassava 1.0 35,000
Cowpea 1.0 40,000
Pepper 1.0 35,000
Livestock
Broilers (500) 50,000
Layers (200) 35,000
Total Gross Margin 280,000
Fixed or Common Costs
One regular worker @12,500 for 12 moths 150,000
Equipment 10,000
Others 5,000
Total Fixed Cost 165,000
Farm Profit = Total Gross Margin – Total Fixed Cost

= N (280,000 – 165,000)
= N 115,000
On 5 hectares, Mr. Ajasa will make a profit of N 115,000
And on 1 hectare, he will make a profit of N (115,000 ÷ 5) = N 23,000
b. Partial Budgeting
Once a complete budget is prepared, partial budgets can be prepared if only changes are needed or
desired. In case of partial budgets, four changes are relevant – two are related to costs and 2 to
revenue. The partial budget can be set as follows:
Debits (N) Credits (N)
Increase in cost Decrease in cost
Decrease in returns Increase in returns
For instance, Mr. Ajasa may want to substitute Yam for Maize, so a partial budget can be prepared
as below: N
a. Increase in costs due to change 15,000
b. Decrease in revenue due to the change 6,000
c. decrease in costs such as saved labour, fertilizer, etc. 20,000
d. increase in revenue 10,000
Additional Income due to changes = (c + d) – (a + b) = N (30,000 – 21,000) = N 9,000
Note that a + b reduce income while c + d increase income.
Budgets can be prepared for quite a number of items on the farm. There can also be a labour
budget, a machine budget or a cash flow budget. A cash flow budget includes operating receipts,
capital sales, operating expenses, capital expenditures, family expenditure, money borrowed and
repayment of borrowed money. When the information is summarized, it will assist in estimating
the amount and timing of receipts as well as the availability of loan repayment funds.
c. Break-even Budgeting
This can be employed to estimate the yield required to provide an exact balance of changes in costs
and revenue, so that the farmer is neither better or worse off. It may be the case that the farmer is
considering buying a new machine but is not certain of the benefits he would obtain by so doing.
A break-even budget will then show the level of benefits needed to cover the extra cost in investing
on the new machine.
Defects in Using Budgeting as a Planning Tool

a. Budgeting assumes linear relationship and hence, ignores diminishing returns and
complementary relationships between enterprises.
b. There is the problem of estimating yields and prices, particularly for new farmers.
c. Many budgets may be needed before a high-profit plan is obtained and even then, there is no
way knowing whether more profitable plans exist.

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AFM 302: FARM PLANNING AND FARM BUDGETING

Steps in Making a Farm Budget

Farm Profit = Total Gross Margin – Total Fixed Cost

Defects in Using Budgeting as a Planning Tool

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