Regardless of how long you’ve been farming, your key goals include long-term financial success and stability. Achieving these goals will be easier if you create a comprehensive budget that enables you to plan your finances, manage risk and track profitability. Despite this, many farmers often struggle to create and maintain a budget that accounts for the many factors that impact a vibrant agricultural operation.
Creating a budget helps you plan sustainable growth and make decisions that are economically viable in the long term. It is often a requirement for loans and grants, which demonstrates to lenders that you have a thoughtful financial plan and are well positioned for the future.
If you’re planning a farm budget for the first time, here are important steps to take.
Step 1: Assess income sources for your farm
Farms often earn income from various sources including crops, livestock and government subsidies. List all crops and livestock your farm produces and calculate their expected yields and prices. You can use both historical data and current market trends to estimate expected revenue from each source. If you receive any government subsidies or grants, include them because they impact your overall income.
As you calculate estimated revenue, account for fluctuations from weather, market conditions or even changes in demand from consumers. Be conservative in your estimates because if your income is overestimated, it could lead to cash flow problems in the future.
Step 2: Categorize and track farm expenses
With your income sources identified, you can break down your expenses into three different categories: Fixed costs, variable costs and capital expenses.
- Fixed costs — such as loan payments, insurance and rent — are consistent regardless of production levels.
- Variable costs fluctuate with production and typically include fuel, fertilizer, labor and seed.
- Capital expenses are the costs of long-term assets such as buildings or equipment.
Listing all your categorized expenses will help you understand how your resources are allocated and identify areas for cost reductions. If you grow multiple crops, you can determine which ones are the most profitable if you track crop expenses separately.
Step 3: Develop a master spreadsheet for your budget
Once you’ve rounded up your income sources and expenses, you’re ready to develop a comprehensive spreadsheet for your farm budget. You might be able to find a pre-made template, but you can create your own template using spreadsheet software.
Include your estimated income and expenses and consider allocating expenses to specific projects or activities if needed. Use this data to create a cash flow projection that tracks financial needs during the year and accounts for seasonal fluctuations of income and expenses.
Refer to this master spreadsheet often to confirm that your farm can cover expenses and make critical investments required to generate income. Keeping an accurate, frequently documented budget will help you make decisions on when to take on new debt, make large purchases or compensate for potential cash shortages.
Step 4: Update and adjust your budget
Your budget is not a static document. To help maintain your farm’s financial health, you’ll benefit from regularly analyzing your budget and making adjustments.
By regularly comparing your actual income and expenses to budget projections, you may identify areas where you can increase your income or reduce costs. If circumstances that affect your farm — such as unexpected drops in crop prices — come up, you’ll need to explore new income sources or ways to cut expenses.
If you consistently review and adjust your farm budget, you’re more likely to stay on track financially and make continuous improvements in your management practices.
Step 5: Analyze financial performance
Once you have an established budget, you can adjust it based on performance from financial tools such as profit and loss statements and cash flow analysis. Profit and loss statements break down revenues, costs and expenses over a specific period. Cash flow analysis reports how cash moves in and out of your business, which helps you assess if you have enough liquidity to meet financial obligations.
Using these tools helps you spot financial issues early, identify trends and make data-driven decisions that bolster your farm's performance. After you identify these issues, adjust your budget accordingly so your farm remains profitable and sustainable in the long term.
A well-structured budget will position your farm not only to manage daily expenses, but also to prepare for unexpected challenges and opportunities. If you need help creating a comprehensive budget, you don’t need to approach it alone. Working with an experienced banker can help you develop a spending plan that optimizes your farm’s performance and helps you achieve your goals.
Miguel Villafana is an Agricultural and Commercial Banking relationship manager for Zions Bank and can be contacted at 208-482-6218 or Miguel.Villafana@zionsbank.com. Miguel and his wife, Camas, farm 500 acres in the Wilder, Idaho, area.
This article was originally published in Ag Proud Idaho.