Create, update and use a farm budget to achieve profits
When the planters start rolling, it’s easy to forget about your business plans and budget goals. Doing so can be lethal for your business. Instead of thinking of these planning documents as a once-and-done task, use them as a daily management tool.
“The best budgeters and financial managers don’t let the budget sit on the shelf for nine to 12 months,” says Andy Pringnitz, a Johnston, Iowa, customer success manager for Granular. “They’re watching it regularly throughout the year.”
Budgets are key tools to help you stay focused on goals. Use them to plan and project costs and revenues for the upcoming production cycle.
“It is important to budget in order to optimize production decisions and forecast the business’ ability to meet financial objectives,” Pringnitz says. “Budgeting is a process and tool that a farm can use to provide confidence in the likelihood of meeting, or in some cases not meeting, the desired outcome.”
Specific And Realistic. Follow two guidelines to maximize your plans: First, be specific and realistic, and second, monitor and update them regularly. Budgets remove the guesswork when determining your cost of production, and they play a key role in your marketing plan.
“You can’t improve what you don’t measure, and budgeting is the first step toward measuring financial performance for a farm,” Pringnitz says. “From there, the farm will have a framework for optimizing decisions that impact financials as the year goes on. Budgeting also creates a discipline mechanism for farms.”
Use your budget as a guide for locking in positive margins when marketing your grain or livestock. “Without knowing break-even sales prices, farmers are relying primarily on luck—and in low-price environments like we’re seeing in farming today, relying on luck is a bad idea,” Pringnitz points out.
Be realistic when projecting your income and expenses.
“This is not a time to be optimistic,” says Wendy Osborn, an Ohio-based regional vice president for Farm Credit Mid-America. “It is best to plan for the worst-case scenario. Try to avoid underestimating expenses or overestimating income.”
Monitor And Update. Revisit budgets as costs and revenues shift from projections to reality. “The great thing about a budget is that once it’s created, it can be improved,” Pringnitz explains. “The best farmers go through each line item and think through options for cutting costs and upping revenue.”
Also, use your budget documents to evaluate your working capital and net worth. Compare balance sheets year over year to analyze progress. “Your net worth should increase steadily each year. If not, that’s a red flag,” Osborn says.
How to March Toward Business Goals
As you pencil out your budget, be sure to include goals for your operation. Will you grow your
acreage base or build a new shop?
“Whatever your drivers, write them down and determine what it’ll take to get there financially,” suggests Andy Pringnitz, a customer success manager with Granular. “This will give purpose to the process of budgeting and to managing the farm accordingly throughout the year.”
Include not only short-term goals but also long-term goals in your plan, suggests Wendy Osborn, a regional vice president with Farm Credit Mid-America. “Your goals should be SMART—specific, measurable, achievable, realistic and time-bound,” Osborn says. “Remember to involve all owners in identifying and setting goals.”
Evaluate risks that might impede your objectives and create a contingency plan for them. “The more you prepare for challenges, the easier they will be to manage if they occur,” Osborn adds.