How do you define budgeting?
Budgeting is the process of planning and projecting costs and revenues for a given production cycle. It is important to budget in order to optimize production decisions and forecast the business’ ability to meet financial objectives. Financial objectives can vary from paying down a certain amount of debt to having enough liquidity to pay for an upcoming capital expenditure. Whatever the financial objective, 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.
Why and how is budgeting critical to the long-term success of a farm business?
You can’t improve what you don’t measure, and budgeting is the first step towards measuring financial performance for a farm. 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. Come July, August, it is much tougher to spend extra money if the expenditure does not fit in the budget, but without one, it’s much easier for a farmer to talk oneself into the idea that the “product will pay for itself”. Sometimes it’s true, but not always!
Budgets are also important for creating a sound grain marketing plan. Having a budget in place before the year begins is useful to know the cost of producing a crop, which in turn enables a farm to calculate break-even sales prices for each crop. From there, the farmer is in a spot to make sales confidently when the price hits the target or goes above. Without knowing breakeven sales price farmers are relying primarily on luck, and low-price environments like we’re seeing in farming today are no time to do that.
What are the 5 things successful farms are doing when it comes to budget?
1. Set goals. This gives you a reason to create budgets in the first place. Goals can range from making space for the next generation, being in a position to pick up acres, build a shop, invest in new grain facility, retire in 5 years, etc.. Whatever your drivers, write them down and determine what it’ll take to get there financially. This will give purpose to the process of budgeting, and manage the farm accordingly throughout the year.
2. Make time for budgeting. It’s easy to put off. The return on your time budgeting is likely to be much higher than spending it on something else. This may take time to internalize and believe. If you don’t believe budgeting is worthwhile, take a couple minutes to list all the financial decisions at stake throughout the production season.
3. Dial budgets in. The great thing about a budget is that once it’s created, it can be improved! The most financially savvy farms constantly find ways to creatively lower costs and increase revenues. Maybe it’s finding a new provider of inputs, maybe it’s going back to your supplier to negotiate, maybe there’s a way to knock 3% off your rents across the board. Whatever it is, you might not think about it unless the budget points out there’s room for improvement. The best farms go through each line item and think through options for cutting costs and upping revenue!
4. Turn the budget into a daily management tool. The best budgeters and financial managers don’t let the budget sit on the shelf for 9-12 months; they’re watching it regularly throughout the year. Farms who are not making decisions with their budget throughout the year are at a disadvantage to other farms in the neighborhood who are. Farms that don’t budget won’t be able to plan capital expenditures, plan for the next generation, know when to market grain, decide when to lock in input price. A budget enables farms to be on their toes rather than their heels.
5. Market accordingly. Effective budgets include assumptions for both costs and revenues. Obviously, the difference between the two determines profitability. To keep an eye on profitability, the best farms make sales decisions based on their costs. This allows them to keep a tab on risk and, as often as possible, lock in a positive margin. You may not get rich selling for small margin profitability, but you won’t go broke either.