A Project Funded by USDA BFRDP Grant #10506276
Development Partners Include:
Lesson 1. Activity 2 – Simple Budgets
Introduction
Budgets are a key planning tool for any financial endeavor. Enterprise budgets are done annually or prior to starting a new project. The budgets allow you to determine if the revenue you expect to generate from the project will cover the potential
expenses you will have to pay.
Enterprise budgets also help you analyze a potential project and determine what expenses you can cut or find alternatives for to reduce your overall costs. You could also use comparison budgets for the same project to determine if you should plant a different crop or raise a different species of livestock that could maximize your profit.
If a budget “doesn’t pencil”, that is if your project won’t meet your enterprise goals over time, then you need to rethink your business plan.
Materials
Students will need to have the following materials to complete this exercise: Pencil
Computer with access to Excel®
or other spreadsheet program - or – Calculator
Student Instructions
Use the projected revenue and expense items provided for Matt’s Metal Shop project to create a simple enterprise budget. Use the Enterprise Budget tables provided as part of this activity. If you have access to Excel® you may create your budget using a spreadsheet and print off each version of the budget requested.
Once you have finished creating the budget, Part 2 of the activity will ask you some choices to consider in order to make critical decisions for Matt’s enterprise.
Part 1 – Creating a Budget
Table 1. Trailer Expenses Variable Costs (per trailer)
Welding rod $35 Paint $35
2x4 metal tubing $180 Lights/Wiring $25
2x2 angle iron $85 Hitch $20
Axle $140 Grinder supplies $15
Tires and Wheels $90 Miscellaneous $25 Plywood for deck $60 Saw blade replacement $35
Screws $20 Hardware $40
Matt must purchase a welder for $600 to complete the project. Since this purchase is considered an investment, it would not appear on an
enterprise budget. However, the depreciation for the welder per trailer built would appear as an enterprise expense. Estimated depreciation is $30 per year for the welder. Matt could potentially build two trailers this year, so depreciation should be evenly split between the two potential projects. Estimated revenue per trailer is $1500.
Table 2. Enterprise Budget
Enterprise Budget: Trailer Project
Revenue
Sales Other: Non-Cash Revenue
Other Revenue:
Total Revenue (A)
Expenses Welding Supplies Materials Repair/Replacement Equipment Hired labor
Other cash expenses Depreciation
Change in supply inventory and prepaid expenses Operating interest
Interest on long-term debt
Total Expenses (B)
Part 2 – Alternative Considerations
Now that Matt has a rough budget developed thanks to your expertise, he has some options to consider before moving forward on his plans. For each option scenario below, modify the original budget in Table 2 to reflect the alternative. Once you have considered the changes to his budget, provide some comments about each choice keeping in mind Matt’s ultimate goal with this project.
Scenario 1 – Build Two Trailers in One Year
If Matt really wants to work at this project, he could technically build two trailers before the end of the school year. Would there be any advantage for him to do so using the budget figures provided in Table 2.? Use the same revenue per trailer.
Create a new budget reflecting this alternative.
Table 3. Enterprise Budget
Enterprise Budget: Trailer Project – Two per Year
Revenue
Sales Other: Non-Cash Revenue
Other Revenue:
Total Revenue (A)
Expenses Welding Supplies Materials Repair/Replacement Equipment Hired labor
Other cash expenses Depreciation
Change in supply inventory and prepaid expenses Operating interest
Interest on long-term debt
Total Expenses (B)
Returns to Unpaid Labor, Management
After completing this scenario, is it in Matt’s best interest to attempt this option over the original plan? Why is this option better or worse?
Scenario 2 – Add Improvements and Lower Inputs
Matt has researched some options for materials to add value to his product. He could opt to use chrome wheels and metallic paint to make the trailer look better for his customers. The costs for wheels would be $120 more than he has listed in Table 1. The fancy paint would set Matt back $145 rather than $35. In addition to the
upgrades, he could save $25 by using a different type of plywood for the decking. He estimates that he could sell the trailer for $1700 with the upgrades.
Table 4. Enterprise Budget
Enterprise Budget: Trailer Project – Upgrades
Revenue
Sales Other: Non-Cash Revenue
Other Revenue:
Total Revenue (A)
Expenses Welding Supplies Materials Repair/Replacement Equipment Hired labor
Other cash expenses Depreciation
Change in supply inventory and prepaid expenses Operating interest
Interest on long-term debt
Total Expenses (B)
Returns to Unpaid Labor, Management
and Equity Capital (A-B)
Student Reflection
1. Why is creating a budget important before you start a new project or enterprise?
2. Why would you want to create a new budget annually for a project or enterprise?
3. What does “Returns to Unpaid Labor” mean and why is this important if you want to create a new enterprise?
