Art and science: budgeting

I’ve operated a farm for several years now, and I’ve never made a budget. As a hobby farmer, I’ve figured out that I’ll pay what I need to pay to keep the sheep thriving, and try to price my chickens so that they are a money-generating proposition.

But, I’m not trying to make a living or support a family with my farming. In my work as the MOSES Financial Director, I put a lot of time into creating and managing a yearly budget. It is so important to the success of this $1.5 million organization that I can absolutely see how helpful a budget would be on any farm with a goal of making a profit.

The process of budgeting involves making educated estimates about what will happen financially in the operation in the future. A budget is a guide to what you expect to spend and what you plan to bring in within a given year—basically a projection of a cash-flow statement.

After years of successful budgeting, I find that it is both a science and an art. The science is in discovering what happened before, and deciding if it will happen again. Those already deep into farming have kept records (I hope) that will be helpful in estimating what will happen in the future. Anyone new to farming will have to work a little harder to come up with the base numbers that build a budget.

The art is in projecting what might change in the future. Is this the year the hoophouse will go up?  How much extra income might be brought in with hoophouse products, and how much more labor will it take? Can you make a plan so that the hoop goes up in time for the early tomatoes, or will fall greens be the first crop? Answers to these questions I consider art—gleaning from your knowledge and wisdom to plan and project what change might bring.

You’ll have to decide if you want to prepare monthly budgets or an annual one. Full-time farmers looking to manage cash flow will want a monthly budget. Part-time farmers with seasonal operations can get away with an annual budget. Obviously, budgets are best made before or early in the period they cover.

A good way to start budgeting is to write a list of everything that you’d like to do, or will do differently in the year. Plan to add 10 cows? Put in a manure pit? Buy a potato digger? Scale back the farmers’ markets? Is your oldest daughter/poultry manager going off to college? Write everything down, and try to think through the financial implications of the change. Will more money come in, will more expenses go out? Don’t just look at the costs of making a new purchase, but look deeper at what else might change with labor, utilities or other implications.

Once you have your list of potential changes, run a report from your bookkeeping program, or take a look at your spreadsheets, to see what you earned and spent last year in each category you track. Create a new spreadsheet, and, looking at each number from last year and your list of plans for this coming year, give your best guess as to what the numbers will look like for this year. If the price of propane is up, you’ll want to increase that line. If you’ve gotten a better deal on the cell phone, you can make that a little less. What’s the speculation at the coffee shop on the early price of hay? How much corn is left with your name on it at the mill, how much might you have to buy? How many calves do you expect to have to sell in the spring? A good session with last year’s numbers, your wish list, a pencil and your brain will leave you with a pretty good idea of what might happen for the year.

Once the incomes and expenses have been penciled in, how does the bottom line look? Are your expected incomes enough to cover the expenses? More often than not, dreams of new things eclipse the realities of income. If you end up with a negative bottom line, you must go back and see what expenses you can cut. It is not a good idea to be over-optimistic with income. You are not doing any good putting false numbers into a document designed to help you predict the realities of the future of your farm.

The real beauty of a budget is in its use throughout the year. Many things will be fairly routine (think supplies and electric bills), but the budget can help guide a lot of decisions. When exploring new feeders for the sheep, remind yourself of how much you have in the budget to spend on small equipment. If your estimate of the cost to buy in corn for the calves is low, you’ll need to figure out something else that you can scrimp on so that you’re not short of dollars at the end of the year. If you expected to get the hoophouse in and producing by early summer, but it’s now looking like it won’t be until fall, you’d better adjust those income projections and spend a little less somewhere to make the dollars come out okay.

Capital improvements (things that you will capitalize and depreciate on your taxes) are generally not put into the “expenses” section of a cash budget. However, it’s a good idea to put a section below the main budget listing the monthly costs of capital investments you expect to make, using loans or savings. This is essential in figuring cash flow. Payment on any long-term loans go in this bottom section, too.

Although budgeting takes time and some skill, I promise that you will get better at it over time. What can seem like a monumental task the first year might become a welcome routine by the fifth. The great benefit that budgeting and monitoring bring to your operation will definitely be worth the energy put in in the long run. I may even decide to make a farm budget myself this year!

For details and examples on creating and using a farm budget, see Fearless Farm Finances pages 201-218.

Jody Padgham is the Financial Director for MOSES, and Editor of Fearless Farm Finances.

February 6, 2014

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