Future planning is a relatively complex task involving many activities on a dairy farm. But even so, there is a need for looking into the future. If it is possible to see. the trends in an early stage and then, if they look promising, make necessary changes, you will be much better off economically than if you wait for the future outcomes.

However, before a decision is made and a certain plan is implemented, it is worthwhile to analyse the effects and estimate the economic outcome. To simplify this procedure different tools can be used. The most common and useful are presented here.

Partial budgeting

A marginal change of the dairy operation (e.g. small increase of the number of cows, installation of a new parlour, installation of out-of-parlour feeders etc.) is likely to affect more than just the major output (e.g. milk). It is also very common that it will influence several inputs (e.g. labour, forage, concentrates etc.) and in some cases more than one output (e.g. milk, calves etc.). To get an appropriate analysis of these kind of problems, a partial budget can be a helpful tool. The information needed to complete a partial budget can be gathered by asking the following four questions:

  1. What new or extra revenue will be gained from the change?
  2. What costs will be saved due to the change?
  3. What revenue will be lost or forgone due to the change?
  4. What new or extra costs will be incurred due to the change?

To get a better view of this principle, we can look at an example. Assume we have a herd of 100 cows. The average milk yield from these cows is 5 700 litres per year and the average consumption of concentrates is 1 700 kg (0.30 kg/litre) per cow and year. Currently the herd is fed TMR through a mixer wagon. Due to the layout of the barn, all cows are fed the same ration.

An option for this farm is to install out-of-parlour feeders to improve the production and the usage of feed. By feeding the cows some of the concentrates through the feeders, there is a potential to increase the average yield by 10% (Tot. 57 000 litres). At the same time it will be possible to decrease the usage of concentrates to 0.25 kg/litre of milk (Tot. 1 420 kg). These improvements are mainly due to better utilisation of the feed when the daily ration is spread over the whole day and the fact that there will be less over- and underfeeding when each cow is fed concentrates individually.

The investment is estimated to cost approximately £ 18 000 (includes: four complete feed stations, 100 transponders, one ALPRO feed processor and installation) and have an economic life of ten years. This information gives us the following partial budget:

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Revenue forgone:   --

Extra Revenue:

Milk Sales, 57000 litres @ £0,22/litre


Extra costs:

 - Leasing of qouta 57000 @ £0.1/1

 - Annual cost for equipment, £18000 @ 10 years depr. and 10 % interest (amortisation factor* = 0.1627)


Costs Saved:

Concentrates, 1420 kg @ £0,12/kg


Net Gain (if any)


Net Loss (if any)

Totals 12710   12710

Example of a partial budget

As the budget above illustrates, the investment in the out-of-parlour feeders will in this case generate an annual extra income of £4 081. By using the amortisation factor, both depreciation and interest are included in Annual cost for equipment (£2 929). Changes can be made to the different factors involved in the budget to find out the economic effects. For example, the milk price can be altered up and down to find out what that will do to the annual income from the investment.

Whole farm budgeting

Whole farm budgets relate to the entire farm plan and are normally used where a major change of the business is planned or when calculations are made for a “new farm.” These type of budgets require all the physical data and the cost and receipt items have to be calculated. The procedure can be divided into the following six steps:

  1. Listing of available resources and stating objectives
  2. Estimating crop areas and livestock numbers
  3. Estimating physical inputs and outputs
  4. Estimating prices and calculating costs and returns
  5. Estimating fixed costs and overheads
  6. Calculating the totals and presenting the information

When a complete budget is used to evaluate a change in the farm plan, it is a good idea to compare it with a .normalised. budget. The normalised budget reflects the current farm plan (excluding the proposed changes), but with the same assumptions for yields (except for the yield that might be affected by the proposed change) and prices. By comparing these two budgets, the farmer can easily find out what the effects are due to the change. He/she will also avoid the risk that a positive budget outcome only is an effect of changed prices and/or yields.

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To be useful, a complete budget must include detailed information about yields, labour hours, use of inputs, prices etc. This is necessary for comparisons and deeper investigations. The information can either be included in the layout of the budget or easily available from a second source. In the simple example below, all expenditures and returns have been summarised and presented under an appropriate heading. To be effective and useful this budget has to be supported by more detailed information.








Other feedstuffs

Misc. cost for livestock


Fuel & repairs



Interest & mortgage

Own labour





















Farm profit

Totals 165400   165400

Example of a simple whole farm budget

Cash flow budgeting

A cash flow budget is a forecast of cash income and outflows over a period. It is mainly used to anticipate and manage peak borrowing requirements (or cash surplus). This information is needed to control the business and is useful in negotiations with lenders. Consequently, the dairy operation has to consider cash flow as well as profitability when making decisions to invest. A profitable investment may be limited by available cash and cash flow.

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The budget will not include depreciation, valuation changes or any imputed items (i.e. non-cash items), but will include capital repayments, capital purchases, tax and personal drawings. Depending on the time horizon, different time scales of the budget can be used. When looking at a coming year, the cash flows are normally estimated on a monthly or quarterly basis. In the example below, quarters are used. Notice that this cash flow budget is based on the whole farm budget presented in table 9. Each transaction has to be put into the period when it really occurs, e.g. fertiliser may be delivered in December (the year before the actual budgeting year), applied in April and paid for in March. In this case, the cost shall be included in period one (Jan.March) as the transaction occurred in March.

If the items of income and expenditure are allocated correctly, the net cash flow should reconcile to the budgeted profit figure. The items to include in the reconciliation are usually the following:

Net Cash Flow

+ Closing valuation (crops and products in store, growing crops etc.)
+ Closing debtors
+ Opening creditors
- Opening valuation (crops and products in store, growing crops etc.)
- Opening debtors
- Closing Creditors
- Depreciation

= Budgeted Profit

In our example, the net cash flow is £46 500, the profit was budgeted to £33 000 and the depreciation is £13 500 (see below). To simplify the reconciliation, we assume that the opening and closing values are the same at the end of the year as they were in the beginning. That gives us the following reconciliation:

Net Cash Flow  £46 500
Depreciation  - £13 500
Budgeted Profit = £33 000

If the cash flow is adverse, several actions are possible. These include: adjustment of credit facilities, delay of purchases, bringing forward sales, restrictive private drawings etc. In some cases, a change in the enterprise mix can reduce the peaks and troughs in the cash flow. On a dairy farm, the income from milk sales is usually relatively evenly spread over the year, compared to a specialized arable farm, wherefore a change in enterprise mix might be of less interest.

The cash flow budget above shows us that the cash flow is negative (.£9 375) during period one. At the same time the opening bank balance is £10 000, wherefore there will not be a negative closing bank balance. However, assume that this negative cash flow is not satisfying. The suggestion is therefore to implement a more even all year calving, which would generate a higher income from milk sales during period one, and/or try to postpone parts of the payments of concentrates to period two. These actions together would eliminate the adverse cash flow.

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