A budget is the farm owner’s plan of action. Without a budget, the owner is literally shooting from the hip when it comes to trying to plan expenditures and match them to revenues. Not only are budgets a plan of action for the owner, they are also a tool to monitor the performance of the business. Budgeting can be used to look back at previous time periods and to look forward to future time periods, as well as to help regain control and ensure you’re being proactive, not reactive, in business management. Budgets can help prevent overspending, but they cannot be developed without a plan.
“You will either learn to manage money, or the lack of it will manage you.” — Dave Ramsey
How to Create a Budget Plan
There are several steps you can take in planning your budget:
- Develop the operational budget to ensure profitability and quantify resources required to achieve your plan.
- Develop your cash budget to plan timing of cash flows and borrowing needs.
- Develop your capital budget to manage the asset investment strategies required for growth and efficiency.
Why should a budget be monitored?
Monitoring actual results compared to the plan will help budgeting in the future—and timely monitoring is the key. This involves analyzing the financial effect of varying yields, prices, input and direct costs, indirect costs, G&A costs, financing costs, expansion, and catastrophic or other economic factors as you move forward into the budget year. Monitoring a budget provides management with an opportunity to develop an action plan that supports and documents any budget deviations. If deviations exist, they become apparent before they are a financial threat to the business. Use “what if” planning to evaluate your corrective action.
What does a budget vs actual report look like?
- Budget compared to actual includes columns for:
- Budget for the period and/or to date
- Actual results for period and/or to date
- Variance/remaining budget in revenues and expenses ($ and/or %)
- Any planned adjustments by year’s end
- Remaining projected adjusted budget
What is learned from the budget vs actual report?
Your budget vs actual report will give you an understanding of what and why events happened, the impact on your action plan, and price/volume/timing adjustments. Budgets are not intended to be static. As the business climate changes, the financial impact needs to be assessed and analyzed. Retain the original budget and update it with actual results to date. Use a rolling forecast with new variables such as crop yield, price, and significant unexpected events. Compare your updated budget to your original budget and modify any of your action plans as needed. Most importantly, keep the stakeholders (owners, managers, and lenders) informed.
When do I look at my budget vs actual report and how often?
Schedule regular monthly or quarterly meetings. The key is to review your information multiple times, instead of only once mid-year or at year-end. Having a regularly scheduled budget vs actual review is the most effective way to minimize overspending because it helps identify at-risk revenue and expense accounts.
Before holding a budget vs actual review meeting, send out the report to those who will attend the meeting and make relevant notes for points of discussion. Invite staff managers and owners so they, too, can explore the report and provide feedback regarding major variances. Make monitoring your budget a priority and assess your overall financial goals during the meeting. While it is key to take timely action to adjust and correct any downward trends and variances, it is just as important to avoid making snap decisions. Carefully think through any corrective action plan before implementing.
In summary, remember it is very important to manage all aspects of your budgeting process, from creating a plan to monitoring throughout the year.
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