Risk Analysis And Partial Budget Template (With Example) (Page 2 of 4) in pdf

opportunities in many proposed changes we also

in a grid format. Examples of this analysis can be

need to consider the interest from the sale of the

seen at the bottom of figure 1 and figure 2. The

livestock or crop.

worst, most likely and best case figures can be

calculated using a general error factor rate of say

10%, or by adjusting the item that is most likely to

3. What new or additional income will be

fluctuate. An example of this second approach

received?

may be calf and yearling prices.

This section accounts for the receipts from the

sale of livestock or crops directly associated with

The end result of the sensitivity analysis is a grid

the proposed change. This is often a very straight

of possible returns from the proposed change.

forward section to fill out.

This can be very helpful in not only convincing

yourself, but convincing others involved in the

4. What current costs will be reduced or

decision making process. It is a very good tool to

eliminated?

take to your loan officer if funding is needed for

the proposed change.

This section usually takes some extra thought to

identify these costs, but often there are costs that

The combination of partial budgeting and

will be eliminated because of the change. Some

sensitivity analysis is robust enough to handle

examples of the costs are; If we change from

many of the questions that ranchers deal with each

selling calves at the auction barn to selling

year. Additionally the method is simple and

yearlings off the ranch, we will no longer have a

reliable enough for any rancher to utilize.

transportation cost for the calves to the auction. If

Cattle ranchers deal with a significant amount of

we purchase hay instead of raise our own costs

uncertainty every day. From not knowing what

such as fuel, equipment maintenance and possibly

the weather will be like this year to wondering if

labor would be reduced or eliminated.

market prices will increase or decrease tomorrow,

agricultural producers are forced to make

To finish the partial budget sections one and two

decisions based on imperfect information. This

are added together and subtracted from the total of

uncertainty creates the possibility of financial loss

sections three and four. This calculation results in

and of financial gain. While uncertainty can lead

a positive or negative return. The decision to

to both positive and negative outcomes, we

implement the change still depends on the

normally think of risk as the possibility of adverse

individual and is influenced by cash flow, risk

outcomes due to uncertainty and imperfect

tolerance and the confidence in the analysis.

knowledge in decision making. For example, a

severe storm during calving season may increase

Now that a positive or negative return has been

calf death loss or drought may reduce forage

calculated sensitivity analysis provides a

resources for the cow herd. A government

framework to visualize the risk of less accurate

mandate on the use of corn for ethanol may

numbers. This is done by calculating a worst,

increase the price of corn and decrease the price

most likely, and best case scenario on both the

of calves.

cost side and the return side of the partial budget.

Once the calculations are made they are then put

Risk Analysis And Partial Budget Template (With Example) Page 2

Related Articles

Related forms

Related Categories