Partial Budgeting as a Dairy Consultation Tool

Abstract

The objectives of this presentation will be to define partial budgeting and to demonstrate its use in dairy health management decision making. Strained profit margins, trends toward increasing herd size, and volatile milk prices have lead to an increased emphasis on the economics of dairy health management, and increased opportunities to provide dairy production medicine services. Management recommendations with major economic consequences should be based on a thorough understanding of the farm's business plan, the farm's current financial status, and the expected impact of suggested management changes. Partial budgets are a useful tool for evaluating the expected financial impact of proposed changes in management, but they should only be used in light of the farm's mission, goals, and objectives. In addition, familiarity with the farm's current financial situation (as can be achieved through evaluation of the net worth statement, income statement, and cash flow analysis) is critical. From that point, partial budgets can be constructed to estimate the net changes in revenues and expenses that are expected to result from potential management changes. Partial budgets project changes in profitability in a relatively straightforward approach that facilitates comparison of alternative resource uses. Sensitivity analysis is always recommended to evaluate the importance of biological and price/quantity assumptions, and is enhanced through computerization. Without exception, results from partial budgeting exercises should be interpreted in light of decision maker objectives, in addition to cash flow, net worth, and profitability issues. In that regard, partial budgets offer the dairy practitioner a useful approach for identifying management opportunities, and for prioritizing management efforts. Examples will be presented.