“I have a budget, but it is in my head.” Does that sound like something you would say? Well, you need to get the budget out of your head and document it on paper, in Excel, or in an accounting program. If you’re not sure how to do this, we’ve outlined some tips to help.
How do I build a budget?
Budgeting is a financial process that can be easily accomplished if you understand the different aspects of budgeting.
What is the difference between a budget and a forecast?
The key difference between a budget and a forecast is that the budget is a plan for where you want to go, while a forecast is an indication of where you are going.
What is the best budgeting process to follow?
There is no one perfect process. However, your process needs to include all aspects of your business which may include accounting, human resources, operations, sales, capital needs, and family living. Seek help from all owners, partners, and managers. The key to a solid budget process is taking ownership of the numbers.
Different Types of Budgets
Understanding the various types of budgets available will help you create a better plan for your finances.
Cash Flow Budget
A cash flow budget is a month-by-month budget of all cash activity for a specific period of time. It is crucial to carefully track your receivables and cash requirements. Maintaining a cash flow budget will help you forecast your overall financial health.
Calendar Year Accrual Income Statement Budget
A calendar year accrual income statement budget (also called a pro forma income statement) is a plan of projected revenues and expenditures throughout a 12-month period. Accrual accounting refers to the recording of revenues that you have earned but have yet to receive, and likewise expenses that have been incurred but have yet to pay.
The purpose of accrual accounting is to match revenues and expenses to the time periods during which they were incurred, as opposed to the timing of the actual cash flows related to them. Thus, in total, your calendar year accrual income statement budget will not match your cash flow budget by month. This report will show a comparison of estimated vs. real numbers to analyze company performance.
Crop Year Managerial Budget
A crop year managerial budget is an enterprise budget (i.e. by commodity) that provides valuable information regarding individual enterprises and commodities on the farm. This budget helps you make decisions regarding the coming production year.
The crop year managerial budget uses farm revenue, the variable cost, fixed cost, and net income to provide a clear picture of the financial health of each farm enterprise and commodity. Your total crop year budget usually will not match your accrual income statement budget (as it will not have the dollar change of prior year’s recorded inventory versus sold price), nor will it match your monthly cash flow budget because it is on an accrual basis by enterprise.
Do I need to utilize multiple types of budgets?
To make timely decisions that are deliberate and focused by enterprise and commodity, you should have all three of the above budgets in place.
What income and expenses do I include?
Include all sources of revenue, including anticipated crop sales for last year’s crop and anticipated crop sales from this year’s crop. Be true to your yields and average pricing, but most importantly, be honest, realistic, and conservative.
Include all anticipated costs, including your direct costs (chemical, fertilizer, crop insurance, land rent, and seed) and indirect costs (overhead and fixed costs) such as labor, repairs, supplies, utilities, fuel, and interest.
What about my debt payments?
Include any principal payments or debt issued in your capital budget and cash flow. Interest expense is already included in your budgeted expenses.
How do I budget for capital purchases?
Any planned equipment purchases and sales are included in your capital budget and cash flow. These purchases are not a wish list, but rather a practical priority list of long-term assets based on need.
Do I include my monthly draws for family living?
Yes, include any family living costs in a cash flow budget. However, do not include these in an accrual income statement budget, as it is an adjustment to the owner’s equity and not an expense.
How do I incorporate “what if” scenarios?
Save different budget drafts that include possible changes before deciding on the final budget. Remember, when the final budget is adopted, it is natural to have a rolling cash forecast once unforeseen events occur. However, maintain your original budget and match it to the rolling cash forecast and actuals.
Do I share this with my family, employees, and lenders?
Yes, transparency and getting everyone who is involved to buy in is the final piece of an effective budgeting process.
If you need assistance with your farm’s financial budgeting or financial processes, the consultants at AgriSolutions can help. We can assist you with reconciling, reviewing, preparing, analyzing, and applying financial data for the optimal success of your ag business. For ongoing updates with helpful insights for your farm, subscribe to Ag Advantage, the AgriSolutions blog.