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Partial Budgets as a Decision-Making Tool


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A partial budget is a tool you can use to evaluate two choices or a change in your operation. It is an easy tool to set up. 
On a piece of paper, draw a 4x4 grid. On the left side, list the disadvantages of the proposed change (added costs and reduced revenues). On the right side, list the advantages (added revenues and reduced costs). The layout is illustrated in Figure 1. 

Figure 1. Sample Partial Budget.

The key to the partial budget is to list any and all changes that will occur if we select the new alternative. As an example, Figure 1 asks the question "do I dry lot my cows in a custom feedlot or buy feed and feed them myself?" This is a fictitious example, with estimates based on a recent AgriProfit$ software program benchmark; your economic values will be different than the example.

First, consider the advantages of the drylot custom feeding option. For example, for added revenues, I have some straw available to sell (I plan to keep half back for next year), plus a bit of feed on hand that can go. For reduced costs, I have no added feed or bedding to buy, no machinery operating expense, no labor expense, no corral repairs and no pen cleaning.

On the disadvantages side of the ledger, added costs include custom feedlot costs of $2.25 per head day for 250 days, trucking costs to and from the lot, and custom calving charges. There aren't any reduced revenues in this example. 

I add up the advantages and disadvantages, then take the difference. In the example, on a per cow basis, there is a $25 advantage for custom drylotting versus doing our own sourcing of feed. Finally, I weigh any other considerations that may affect my decision. 

This tool works for almost any decision, whether it is a machinery purchase, land investment, crop or livestock alternative. It also works for multi-year decisions to show the longer-term effects of a change. Remember to include all costs and revenues, not just cash items. Include unpaid labour, depreciation and fixed costs in the evaluation. 

Figure 2. Partial Budget Template. 

Prepared by:
Jeff Millang
Financial Business Analyst, Olds

For more information, contact:
Alberta Ag-Info Centre at 1-866-882-7677 
Source: Agdex 818-1. Revised July 2004.





For more information about the content of this document, contact Jeff Millang.
This document is maintained by Ada Serafinchon.
This information published to the web on July 22, 2002. 
Last Reviewed/Revised on July 1, 2004. 



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