I see way too many farmers and other business people who treat their annual budget as the necessary evil that the banker requires at year-end to get the loan. A very successful farmer will, rather, treat a budget as a dynamic live tool that will help guide their operation to maximize profits.
First, lets review what I call a dynamic live budget:
- A farmer should maintain a budget that incorporates each of the following financial statements:
- Balance sheet,
- Income statement,
- Statement of cash flows,
- Statement of bank operating line / excess cash
- Each of these statements should be updated at least quarterly, preferably monthly, with the latest actual year-to-date numbers and then projected out for the rest of the year.
- The farmer should try to break down the income and expense by related crop year. For example, the farmer should group the expenses related to growing the 2010 corn crop with the actual and projected income related to the 2010 corn crop.
- To ease the presentation in a report, I would set up the budget to report this information on a quarterly basis. You may want to detail the budget by the month, but I would report it in a quarterly format.
- The farmer should then incorporate at least one more year if not two more years into the budget.
- By doing a balance sheet and statement of cash flows, the farmer will be able to determine what equipment needs to be bought, what is the appropriate time to buy, when should additional labor be added, etc.
A dynamic live budget is one of the most powerful financial tools that you can use as a farmer to run your operation. To properly set up the budget will require work on your part and possibly a consultant if you are not comfortable setting up spreadsheets. However, doing this initial work will tell you a lot about your farming operation and once you get it operating properly, when the banker asks you for the budget at year-end, you simply print out your latest report and hand it to them.
I am fairly certain that all farmers in the upper 10% of returns are incorporating some type of dynamic live budget. I would love to hear from our readers on what type of budget they are using in their farm operation right now and whether they consider it to be dynamic or not.