Why do you need a budget for your family farm?
A budget is a farm owners’ plan of action. Without a budget, farm owners are shooting in the dark when it comes to trying to plan expenditures and match them to revenues. Budgets are also a tool for operational performance evaluation. Budgeting allows farmers to model the financial effect of various yields, prices, input costs, expansion, and other economic factors. A budget helps you carefully control expenditures and prevent unplanned and over-spending.
What is a budget?
A budget is a quantitative operational plan that identifies the resources you need to meet your goals and objectives. A budget comprises both operating and capital budgets to create a financial budget. Operating budgets identify the use of resources in operating activities, including production, purchasing, and sales. A capital budget details long-term outlays of cash and defines assets that are needed to fulfill your plans. Financial budgets combine these to identify sources and outflows of funds, capital and financing needs, and expected operating results for the period. A good budget uses historical data as a base and reference but also incorporates anticipated costs and revenues based on knowledge and understanding of internal and external factors that affect the operation.
What is the difference between a cash budget and an accrual pro forma income statement?
A cash budget shows cash going in and out of your farm. It tells owners if they will need additional cash to carry out business operations. A pro forma income statement, on the other hand, takes projected sales and subtracts cost of goods sold as well as other expenses to report or projected profit on an accrual basis.
What about the balance sheet? A projected or pro forma balance sheet contains the results of the assumptions and specific future economic scenarios, using data flowing from the projected income statement. It includes projection data for assets, liabilities, and equity/net worth.
What periods should a budget cover?
When preparing a budget, consider the timelines that are most relevant to agriculture:
- Yearly (entity basis—12 months)
- Crop cycle (managerial basis—18 months or more)
- Multi-year budgets (1 to 5 years)
What are the goals for a farm budget?
One goal is to become a proactive—rather than reactive—farm operation manager. A budget can examine margins by commodity and project profits remaining for gross profits and distributions. It identifies what profits are required for interest payments, living expenses, distributions, debt service, and asset growth. Your farm’s budget should become the master plan for employees and partners.
How do farm owners formulate a budget process?
First, consider all aspects of the farm operation and how they all interrelate with each other (see the processes flow below). Have a central point of contact to be a budget facilitator (not an owner), and automate the budget. Examine the past; much can be gained from understanding prior years’ activity. Most importantly, be honest and realistic. Take time to do the budget right, and have monthly budget meetings. Make your budget process iterative and all encompassing, and remember to constantly review and improve. Finally, in the end, obtain ownership approval.
What does the farm owner do with the budget once it’s approved?
After approval, the budget should be entered into a farm accounting system like AgManager. Budgets are not intended to be static; it’s essential to assess and analyze the financial impact of changes in the agricultural business climate. Perform budget analysis by producing monthly reports that retain the original budget, comparing to the actual results to date, and arriving at manageable variances. Use a rolling forecast with new variables such as crop yield, price, and significant unexpected events. Compare this forecast to the original budget, and modify any action plans accordingly. Keep stakeholders, such as owners and lenders, informed.
In conclusion, budgets can’t be developed without a plan. Develop the operational budget to ensure profitability, and quantify the resources required to accomplish your plans. Develop a cash budget to plan timing of cash flows and borrowing and a capital budget to manage the asset investments necessary for growth and efficiency. Monitor results and compare them to your plan in order to budget more effectively in the future.
If you need help, the expert consultants at AgriSolutions, a FamilyFarms Group company, can guide you in defining your farm’s current situation and specific needs. We provide financial training to help farm owners get a better handle on how to implement best management practices.