It focuses only on the changes in revenue and costs that would result from implementing a specific alternative rather than including all farm revenue and costs.
A partial budget is often used to initially evaluate ideas, with further analysis such as annual budgets and cashflows completed once the most likely option is selected.
When and how do you use a partial budget?
Partial budgets can be used for:
- Enterprise substitution: can be a complete or partial substitution of one enterprise for another e.g. convert from dry stock to dairying.
- Input substitution: changes involving the substitution of one input for another or the total amount of the input to be used e.g. making supplement on the farm rather than buying in; going from a high input to all grass system; increase or decrease nitrogen use.
- Size or scale of operation: change in the total size of the farm business or in the size of a single enterprise e.g. buying or leasing more land.
Identify the most 'important' factors first
Partial budgeting analysis is a useful tool in decision making however does not necessarily lead to identifying the most important or high priority areas that contribute to overall farm profit.
It can therefore be very helpful to have completed a full historical financial analysis of the farm business to identify the current overall farm performance e.g. an option may be to grow turnips but, after further analysis of the whole farm, pasture utilisation is low and herd mating results are below target. Because of this there may well be a higher return by focusing on improving these factors first.
Handling capital expenditure and change in debt
To account for capital expenditure as part of a proposal depreciation and cost of capital or interest cost should be included. If assets are sold an interest saving should be included rather than the total asset value.
Net present value approach
Partial budgeting does not account for changes in the value of money over time. If analysis is required to focus on effects that occur more than a year or two in the future, then a net present value approach should be used, which discounts the dollar amounts in future years to account for the lower value compared to current-year dollars.
Format of a partial budget
Status quo situation
Describe the current farm situation or 'status quo' before any changes are made. The aspects of the farm entered here should be relevant to the changes proposed.
Proposed change to status quo
It is important to clearly understand exactly what alternative is being analysed. If possible, analyse several alternatives with a partial budget calculated for each alternative.
Extra clarity will be gained by including as many relevant assumptions as possible.
Gains and losses from the proposed change
On the left side of the partial budget include estimated 'gains' or benefits from the proposed change and on the right side include 'Losses'. Gains can be from either increased revenue or decreased costs. Losses can be from decreased revenue or increased costs. Aim to identify as many gains and losses as possible.
Include some form of sensitivity analysis. The partial budget will show one set of financial assumptions. Change 2 to 3 appropriate variables e.g. milk price, feed costs etc and summarise the results.
Other considerations / non-financial factor
Often it will be the non-financial factors or other considerations such as risk, work load, complexity and ‘gut-feel’, that will ultimately be the deciding factor as to whether the change will be implemented. Ensure all relevant considerations are documented and thought through.
Briefly summarise the financial results, sensitivity analysis and other consideration in a few sentences. Comment if more detailed financial analysis is required.