Arguably one of my favourite words is budgets. The official definition of the word “budget” is an estimate of income and expenditure for a set period of time. A budget is simply research and thoughtful decision-making on money. It gives you the ability to foresee big issues and find solutions before you have a crisis. When you are running a farm, a budget lets you plan your cash flow in advance. It allows you to be purposeful with your spending.
Do not confuse cash budget with the cost of production, the two are separate calculations. Budgets can be applied to any kind of project. They can also be called forecasts. This primer focuses on cash budgets, tracking your overall revenues and expenses. You can also have a budget for your cost of production, starting a new project, construction plans or even buying a farm like last week’s blog.
Track your revenues and expenses
First things first, before you can make a budget, you need to track your income and spending for both your farm and your personal life. If you use your debit and credit card for all transactions, this is simple. You can export your transactions from your bank account to a CSV document which can be opened in Excel. You can also sign up for an accounting program like Wave Accounting and import your bank statement into the program.
I absolutely love Wave Accounting and use it for my own farm. It is free for standard uses. It has a section for your business and for your personal finances. My only caution is that you should NEVER connect your bank account to any service, it is simply too risky. You can upload your statements to pretty much any accounting software but Wave is my recommendation unless you are doing more than $75,000 of monthly transactions or your bank statement is more than 3 pages long. Then you might want to look at Quickbooks as full-scale accounting software.
Once you have all your transactions, go ahead and categorize your spending and income. This is where using Wave will really make it simple for you because it can automatically categorize your transactions in batches as well as generate reports for you. Once you have your report or an itemized list of your spending, analysis it. Ask yourself if the numbers that appear are normal, or are there one-time costs like a tractor repair or a vet call? Print off the report and make any notes about the results. Do the same for both your personal finances and your farm business.
Personal Finance Budget
Once you have your income and expenses tracked, it is time to sit down and figure out your budget. For your personal finance budget, you can use last month’s spending as a starting point. If you have off-farm income, include that as your revenue. Otherwise, add a line for each living expense you have. Set your spending intentions based on your historical spending. If at all possible, make sure you include a line for your savings. There are a ton of tools for setting personal budgets online. Research shows that it takes at least 3 months to straighten out a personal budget so do not be discouraged.
If you struggle to figure out what you plan to spend or what kind of costs you should include, I would consider the following:
- Personal hygiene products
- Clothing and footwear
- Cellphone, internet, television
- Subscriptions like Netflix and Amazon Prime
- House insurance, and utilities
- Life insurance and medical expenses
Farm Business Budget
For your farm budget, it is probably not as simple as just taking last month’s report. Farms are not typically predictable but they are generally cyclical. This means there is a cycle to your revenue and spending. It can be easier to make a seasonal budget for your farm. Before you get started, pop on over to the Mentor page and download my free production planner to help you with this. Use the planner to figure out when you tend to sell your products and when your main expenses happen by thinking about your activities for the year.
I would suggest you do this budget in Excel or another spreadsheet program. Google Sheets can work really well as you can then pull up your budget on your phone if you are out at the feed store and making purchasing decisions. Set up your spreadsheet with the following sections:
- Revenues (cash coming in)
- Total Revenue
- Expenses (cash going out)
- Total Expenses
- Net income (total revenue less total expenses), or net cash
- Opening cash
- Add net cash
- Closing cash
Setting up the budget
Set up your farm budget by listing off your cash inflow sources. I generally split the revenue section into two groups, one group is for all farm revenue sources like livestock and crop sales. The second group is for other income sources that bring in cash like interest, rebates, and off-farm income. By splitting it up this way, I can see all parts of my finances at once but also look at each independently. It works great for a cash budget because nothing gets missed and there are no hidden surprises.
If you are going to include your off-farm income on your farm budget because you are just starting out and need the cash to cover operating costs, I would suggest you also add a line to subtract the total personal expenses from your personal budget. Adding your personal living expense as a line item on your farm business budget is basically how you will pay yourself. Remember to make the timelines match up, if you are doing a seasonal budget, you need 3 times your monthly personal budget (each season is roughly 3 months long). In the end, it’s about what you feel most comfortable with and what gives you the picture you find the easiest to relate to.
In the expense section, you should list every expenditure you normally have for your farm including insurance, utilities and property taxes. Use your production planner to determine which season has what costs. I split this section into three groups, one for direct production costs like feed and veterinary care, one for general farm expenses like repairs and insurance and a single line for personal costs. I typically have the financing expenses in their own section, split into interest and principal.
Overall, the basics of a budget are just cash available less cash required to pay bills. Having the opening cash balance at the end allows you to see how short or over your budget you will be at the end of the season. On a farm budget, you want to plan out your year in such a way that you can always cover the shortfall from one season with the extra cash from another.
I’ve put together a quick sample HERE which is purely arbitrary numbers made up to show you what a budget can look like.
It is important to do your research on the numbers, as this is not the place to guess. The purpose of the budget is to find out what the expenses will actually cost you and where you need to find savings. If you look at the sample of the budget, you can see that some parts of the year require more cash to be spent. There are two ways you can find out what kind of numbers you should put in your budget which is your tracked historical numbers or by calling suppliers for estimates and quotes.
If you are selling livestock and there is a seasonality to the pricing, it can help to embed a formula in your budget that multiplies the number of animals you expect to sell in a season by the average price for that season. Doing your research can include finding out of you can pre-sell any of your sales to stabilize your own price.
A major line item if you have livestock will be the feed. It is key to have a balanced ration which will give you what components you need to purchase. First, calculate how much feed you need.
- Feed formula: Feed ration component X animals on feed X days on feed
Once you know how much feed you need, you can call around to the feed stores and get prices. You might find that buying in bulk because you took the time to calculate exactly how much feed you need ends up saving you money. It is worth your time and effort to call around because if you need a cheaper source of feed, you could potentially adjust your ration to take advantage.
You can also plan the timing of your purchases based on the room in your budget. Once you have your first draft, you might find out that you simply can not afford to take the early purchase order on seed because you will not have the cash at the time. This is where looking at a budget by the season can really be helpful because as farmers, we tend to think in seasons. Update the budget as you get new information. This will allow you to stick to the budget better. Sticking to the budget means you should not get any shocking surprises financially speaking because you planned for them.
- Track your finances
- Find a template for a budget that suits you (seasonal or monthly)
- Update the budget as you get new information
- Stick to it!
If you find yourself stuck on budgets at any point, reach out, I would be happy to help! Budgets and spreadsheets are some of my favourite things.
[…] did you? I still numbers and budgets, especially in this time of uncertainty. Read The Budget Primer and Scenario Planning if you are not sure where to go. As always, the resources on the homepage […]