I'm new to farming and getting ready for first season. Trying to create budget.

Question

How do you figure land costs as a line item. We bought 160 acres 78 of which is tillable. Paid $400K and owe $388K after 3 years of rec. CRP payments. Do I seperate tillable from non? Do I figure debt amount across acres? Do I figure just interest or principle plus interest? Same on machinery. Bought a tractor last year and CPA depreciated 100% last year. Have a 1% interest only loan on it. Do I count interest only, interest plus principle and what about depreciation? Thanks in advance.

Answer

There's more then one way to do it but we typical do a "cash" budget. Not sure who original said it but "cash is the blood of a business" so managing cash flows is what we focus on.  So all principle and interest payments due that year across the tillable acres only. We normal don't budget depreciation rather budget a fairly high repair bill per acre to offset that, some of that's just our model of running a little old equipment.

That being said I think don't there is a gold standard correct way to budget for a farm. Everyone will come at it from a different angle. It's just a budget, reality never matches it perfectly.

Answer

Similar answer, though there are different philosophies depending on your enterprises. The bank will care most about overall cash flow. Money in compared to money out. 
We like to know where our costs and profits are coming from so each field has a separate budget. That does mean that some years a field will have negative return depending on rotation and rent (wheat in our area). 
Some people "subsidize" or average land costs over all their acres, we don't just so we can stay on top of if a field may have too high of rent for what it produces. 
Some people only count equipment costs based on what is used in a field. (The planter costs only apply to corn and beans, the drill costs only apply to wheat.) We average equipment/repair over all our fields. 
The livestock get their own budget, and that can really get complicated when you feed your own crops. There you almost have to take fair market value to account for "opportunity costs" for if you would have sold the crop, or be needing to buy it in. 
We have principle and interest as separate items on the budget, since the operating note adds more interest, but the principle is built into spending.

We use a simple spreadsheet for our own budgets, and then we also use PCDart with our FBFM accountant, and the bank has it's own way it likes to see things.

The important thing is that you know where you are spending money, where you are making money, and how much you can handle before you are over leveraged or eating away equity faster than building it so you can adjust and plan appropriately.

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I'm new to farming and getting ready for first season. Trying to create budget.

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