You’ve put in the hours—carefully planning your 2018 crop mix, inputs and rental agreements. Now comes the fun part, actually planting this year’s crop. While it might be hard to focus on anything but planting, you need to keep a careful eye on your budget and business goals.
“A budget requires detailed tracking, analysis and fine-tuning,” says Chris Barron, director of operations and president of Carson and Barron Farms in Rowley, Iowa. “Most operations are walking a tightrope between profit and loss, so there’s never been a more prudent time to control and manage your budget. When walking this tightrope, opportunities to improve your balance will only come by watching where you are going.”
Your annual budget is simply a forecast of your expected income and expenses. As the season progresses, your costs shift from expected to actual, and you can assess why your costs or revenue is below or above your projections.
For example, if your seed budget is $275,000 but you paid $285,000, how did you justify the $10,000?
“There might be a perfectly good reason, such as the need to increase seeding rates or add a hybrid with an additional trait,” says Barron, also a financial consultant for Ag View Solutions and Top Producer columnist. “The primary issue isn’t whether you spent more money than anticipated but whether you can justify it.”
Evaluate your budget every month, advises Nick Stokes, managing director of Conterra and a 20-year ag banking veteran. Also, ask your lender to review your projections.
“You and your banker should have regular conversations about your financial standing,” Stokes says. “Monthly monitoring removes surprises, sets expectations and makes both you and your banker more comfortable. This is important, since we’re already uncomfortable because of pure economics.”
Regular analysis transforms your budget from a once-a-year task to a forward-looking document, Stokes says. “You can gauge how an increase in costs or profit will affect your overall cash flow for the year,” he says.
By knowing exactly where every dollar is spent on the farm, you can identify costs to prune—or not prune.
“Areas to trim with extreme caution include those involving people on your farm team, fertility, crop protection, equipment timeliness and seed technology,” Barron says.
Even small cuts can add up to significant savings. “Simply reducing expenses 2% to 3% in four or five line items can make a dramatic difference to your bottom line,” Barron says. “If you are able to find savings of 1% in every category, you can often improve the bottom line with a return on investment of more than 5%.”
Overhead Expenses: Opportunities to Save
Overhead expenses might appear to be fixed, but many are manageable if regularly analyzed, says Chris Barron, Iowa farmer and a financial consultant for Ag View Solutions.
- Machine repair and maintenance
- Owned trucks and utility vehicles
- Repairs to buildings and bins
- Bank fees
- Technology subscriptions and fees
- Office supplies
- Social Security and Medicare taxes
- Medical, life and disability insurance