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Enterprise Analysis

Enterprise analysis represents estimates of receipts (income), costs, and profitability associated with the production of agricultural products. The information contained in the enterprise analysis can be used by agricultural producers, extension specialists, financial institutions, government agencies, and other advisers making decisions in the food and fiber industry.

Enterprise Analysis Budgets are used to:

• Itemize the receipts (income) received for an enterprise.
  
  
• List the inputs and production practices required by an enterprise.
  
  
• Evaluate the efficiency of farm enterprises.
  
  
• Estimate benefits and costs for major changes in production practices to provide the basis for a total farm plan.
  
  
• Support applications for credit.

Enterprise analysis should contain receipts (income) for every product and by-product of the enterprise. Prices used should reflect market values and productivity of enterprise resources (land, labor, equipment, etc.)

Enterprise analysis should be prepared with specific objectives in mind. Receipts and costs often are difficult to estimate in budget preparation because they are numerous and variable. Therefore, you should think of using sample enterprise analysis budgets as a first approximation and then make appropriate adjustments that reflect the specific production situation.

Enterprise analysis contains several cost components. Determining the costs of production practices can be difficult. Individuals often disagree over which costs to include and how they should be measured. Understandably, these differences arise because production costs are unique to each resource situation. An important financial distinction is the concept of variable and fixed costs in the enterprise analysis.

In enterprise analysis, variable costs are those expenses that vary with output within a production period. Examples include expenses for feed, marketing, herd health, breeding, seed, fertilizer, chemicals, fuel, repairs, and hourly or seasonal labor. Other enterprise analysis terms used to describe variable costs include cash costs (or expenses), direct costs, and out-of-pocket costs. Fixed costs do no vary with the level of output. They include depreciation, taxes, interest on investment, land charges, salaried labor, and insurance. Sometimes a management fee is also included as a fixed cost. Indirect, non-cash, and overhead costs are other terms used to describe fixed costs in enterprise analysis.

In enterprise analysis, total costs (variable) and fixed costs are added together. While an enterprise should earn a profit above total costs, this is not always possible. Income received often is less than the total production costs. Should an enterprise be continued under these circumstances? The answer may be yes if (1) returns are above variable costs and (2) this is a short term condition. If fixed costs are not covered in the long run, however, reinvestment in capital items (such as tractors, implements, buildings, and equipment) cannot be made and existing capital stock eventually is depleted.

Enterprise Planning and Financial Management

Enterprise analysis budgets are very useful in selecting the mix of enterprises which will be undertaken on the farm. They can be used to provide an estimate of overall profitability and resource requirements (land, machinery, labor). Enterprise analysis can be used to estimate borrowing needs and cash flow for the farming operation. When borrowing money to finance operations, you can show that you have carefully evaluated potential earnings and credit needs with a good set of enterprise analysis budgets.

Break-Even Analysis

Enterprise analysis is useful for performing break-even analysis for prices and yields. The break-even price is computed as follows:

• Break-even price = anticipated total costs / anticipated yield

This is the minimum price per unit required to cover all costs at the anticipated yield. The break-even yield is computed as follows:

• Break-even yield = anticipated total costs / anticipated prices This is the minimum yield required to cover all costs at the anticipated price per unit.

Break-even analysis is a useful farm management tool because it allows the calculation of various combination's of price and yield that will cover anticipated costs. Break-even analysis can also be used to calculate the break-even price or yield required to cover variable costs (short term production decisions).

If anticipated receipts are greater than anticipated variable costs, you should continue the enterprise. Any loss would be equal to some amount between the difference in total costs (variable costs plus fixed costs) and variable costs. If anticipated receipts are less than variable costs, losses would be minimized by not continuing the enterprise. In this situation, losses would be limited to the amount of fixed costs that you would have to absorb.

WebEquity calculates a complete financial analysis on any loan type, from the simplest loan requests to the most complex agricultural and related small business credits utilizing the Farm Financial Standards Ratios and RMA Industry Comparisons. Credit bureau reports can be pulled from within the WebEquity system and lenders can include that information in their scoring and rating parameters.

WebEquity also provides the Fair, Isaac LiquidCredit® analytic and decisioning service for small business lending, including the industry-leading Small Business Scoring Models^SM (SBSS^SM) functionality so lenders can quickly and confidently process loans up to $250,000 with little or no financial data.

Source: Enterprise Analysis