Topic 2: Farm Planning and Budgeting
1. Farm Planning
A farm plan is a programme showing what a farmer intends to produce, how, with what resources and when.
Importance
- Ensures efficient use of resources.
- Helps in decision making.
- Reduces risks and wastage.
- Guides credit applications.
- Helps in monitoring and evaluation.
- Maximises profit.
Steps in Farm Planning
- Survey resources: land, labour, capital, management, climate and markets.
- Identify enterprise options.
- Select the best enterprises (using budgets).
- Draw the farm plan and layout.
- Implement the plan.
- Monitor and evaluate; revise when needed.
2. Farm Budgets
A budget is a forecast of expected income and expenditure for a given period.
Types
| Budget | Purpose |
|---|---|
| Partial budget | Compares costs and returns of a proposed small change |
| Gross margin budget | Compares enterprises using revenue minus variable costs |
| Complete (whole-farm) budget | Plans all enterprises on the farm |
| Cash flow budget | Forecasts monthly cash receipts and payments |
3. Partial Budget
| Benefits | Costs |
|---|---|
| Extra income from the change | Extra costs |
| Costs saved | Income lost |
If benefits exceed costs, the change is worth making.
4. Gross Margin
Gross margin = Total revenue (gross income) - Total variable costs
Example: Maize (1 acre)
| Item | KSh |
|---|---|
| Revenue: 30 bags x 3,000 | 90,000 |
| Variable costs: seeds | 3,000 |
| Fertiliser | 12,000 |
| Labour | 15,000 |
| Chemicals | 4,000 |
| Total variable costs | 34,000 |
| Gross margin | 56,000 |
Gross margins are used to rank enterprises and choose the most profitable.
5. Cash Flow Budget
Shows cash inflows (sales, loans) and cash outflows (inputs, wages, loan repayments) month by month to identify periods of cash shortage.
6. Factors Considered when Choosing Enterprises
- Climate and soil suitability
- Market and prices
- Capital and labour available
- Skills and technology
- Risk and profitability
- Government policy
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Quick Quiz
- Total revenue plus variable costs
- Total revenue minus variable costs
- Total revenue minus fixed costs
- Variable costs minus fixed costs
Answer: Option 2- Complete budget
- Partial budget
- Cash flow budget
- Balance sheet
Answer: Option 2- KSh 90,000
- KSh 56,000
- KSh 124,000
- KSh 34,000
Answer: Option 2