Planning Ahead: Building a Farm Budget

It’s time to start thinking about planning your farm’s budget. Proper planning ahead of time will help you make major decisions for your operation. 

Join FBN®’s Sunday Mancini as she sits down with TJ Wilson to talk about farm planning and budgeting.

TJ Wilson is the Director of Sales for FBN® Finance. He comes to FBN from a 15 year career in the banking industry working in lending and management roles after graduating from Kansas State University. In addition to working in FBN Finance, TJ is also part of a corn and soybean operation with his family in Northeast Kansas.

Farm Planning and Budgeting Webinar Agenda

• Getting started (00:00)

• Projecting your income (03:03)

• Projecting your expenses (07:17)

• Prepping your balance sheet (12:23)

• Financial ratios explained (17:35)

Watch Now: Building a Farm Budget

Farm Budget Benchmarking Tools

As TJ mentions, there are a number of tools that are produced annually by different universities across the country. A few good benchmarking tools include those below:

• Kansas State University - https://www.agmanager.info/sites/default/files/pdf/Farm%20Financial%20Benchmarking.pdf

• University of Illinois - https://farmdocdaily.illinois.edu/2018/09/what-should-my-farm-benchmark

• University of Minnesota - https://www.cffm.umn.edu/initiatives/benchmarking/

[WATCH: Webinar: Refinancing Your Land Loan: Maximize Savings & Opportunities]

Loans from FBN Finance

Applying for a loan can sometimes feel like a daunting process, but the loan advisor team at FBN Finance is here to help. With an average of 15+ years each in Ag finance experience, FBN loan advisors are available to talk you through all facets of the real estate loan process, discuss any questions or concerns you may have and make sure you get the solution that best fits the unique needs of your Ag operation. 

Click here, complete the brief form below, or call 866-619-3080 to get started.

Audio Transcript

Sunday Mancini:

Hey everyone, this is Sunday with Farmers Business Network® and we're here today to talk about all things budgeting and financing as we look toward 2022. And TJ Wilson is our expert who will be guiding us through this journey. He is the head of sales for FBN® Finance. So, hello TJ. Let's dive right into it.

TJ Wilson:

Thanks for having me.

Sunday Mancini:

Let's get started with the biggest question that maybe everyone has. Why do I need a farm budget?

TJ Wilson:

I think budgets are important for all farmers as they're looking because the crop year is obviously year to year, so we need to think about what's the next year gonna look like what kind of income are they gonna generate off of that crop or their expenses gonna be, and start building a baseline for what that may look like and help them make some decisions for the next year.

Sunday Mancini:

Awesome. So going into this budgeting process what information do farmers need to create or update their current farm budget?

TJ Wilson:

Yeah. The best information to use when creating a farm budget is looking at your historical information. Obviously farmers all have tax returns, you know, look back at what your expenses have been historically, try to build a baseline for what that may look like for the next year.

By this time of year, a lot of farmers are already starting to lock in their expenses as well, so they're gonna have a good idea of what their crop is gonna cost them to raise over the next year, and they're gonna know what they're gonna plant what their formal planting attentions are gonna be because they, a lot of them have already bought their seed, so they're gonna have a good idea of what their expenses are.

And then when it comes to the expense or the income side of things, just narrowing down, you know, being conservative with what you're looking at, you know, what are you gonna raise? How much are you gonna raise?

What are conservative price estimates gonna be? So looking at those types of things, or that's the main information that you're gonna need in building your budget for the next year.

Sunday Mancini:

Gotcha. And so if they go about sort of creating a plan and they're thinking about it conservatively, how do they set goals for a crop year?

TJ Wilson:

Yeah, I think it really comes down to each individual operation has different goals. So what is your goal for the year? Is it paying off debt? Is it building working capital? Is it making as much money as you possibly can? Is it taking risk off the table?

So you know, based off of what your goal is for your operation sitting down and com, coming up with a budget that will build around those goals and help accomplish that.

So looking at it from the standpoint of, you know, knowing what your revenue that you want, what your income is that you want to accomplish, what your goal is, build a conservative estimate both from the income and expense side of things to try to build in those types of baselines for yourself.

You know, a lot of operations, you wanna make sure that you're conservative in what your expense approach is gonna be to make sure that you've built in enough cushion to, you know, handle the unforeseen situations that we've seen over the last few years.

There's a lot of volatility in the ag space, especially on the income side right now. So building in a good cushion for yourself and building in a lot of leeway for your operation to be successful is the utmost importance.

Sunday Mancini:

Gotcha. Awesome. So let's take a minute to sort of look at projecting income for farmers. So as they look toward 2022, what are the some of the key components of projected income?

TJ Wilson:

Yeah, the, the key components they're gonna look at is basically the crop insurance information. So most operations have an average yield or an APH that they look at for crop insurance purposes.

You know, when you're building a projected cash flow, use that APH information as your average yield. So I would set that as your baseline your under your straightforward main budget plan.

And then on the pricing side of things, you know, use conservative estimate there. Obviously we have crop insurance prices that are set in March.

But use the December planning prices or whatever those planning prices is are for the crop that you're gonna grow and build in a little bit of cushion off of that, discount it a little bit to make sure that you have some cushion for that volatility that's in the market and use that yield in that price estimate to build in those types of scenarios.

TJ Wilson:

Obviously government payments is another key item that a lot of farmers are have kind of grown used to over the last few years. Typically, when I'm helping prepare a crop budget, I do not utilize government payments whatsoever.

You can't count on 'em, you never know what they're gonna do year to year. So build that budget off of what your actual crop intentions are gonna be in what you expect to grow that year. So those are pretty important when building that.

And then on the flip side of that, I typically build one or two other budgets as well on the income side of things.

You know, build a revenue plan based off of, you know, what you actually expect to grow from a yield standpoint with some good prices and then go the other direction, you know, what does a crop insurance price look like for yourself this year?

You know, if you have a disaster crop and you have to live off a crop insurance, how does that affect your budget overall so that you know, both ends of the spectrum or what you're gonna deal with.

Sunday Mancini:

Yeah. Awesome. So looking at those benchmarks how can farmers use benchmarks to evaluate their projected income?

TJ Wilson:

Yeah, obviously this is the, the budget is a tool year to year. And it's not a one and done thing at the beginning of the year when you're making your budget plan. So most farmers should adjust that budget throughout the year and use it as a tool to help guide their decisions all year long.

Mainly their marketing decisions, that's an important item for them or their other purchasing decisions if they have the ability to prepay, you know, how does that look like compared to last year, you know, what were those prices last year?

How did that fit into their budget and how to affect their budget overall from a breakeven standpoint on their crop? So utilizing that all year long.

And then looking at it from year to year, you know, when you did your budget last year and versus this year, what were those comparisons?

You know, what was your breakeven difference? Where did you spend more last year than you plan to spend this year? So using that historical information going forward is just gonna help you be a sharper operation.

Sunday Mancini:

Awesome. so as far as, this is sort of a fun question to, to wrap up this segment, but what steps can I take and what steps can farmers take to improve their 2022 income?

TJ Wilson:

You know, farmers are doing everything they can right now to try to, you know, limit as much risk as they possibly can. Right now, that's the biggest challenge is the volatility in the risk in the market. So a lot of farmers are trying to do what they can to limit the downside.

So what they can do right now is continue to use any risk management tools they have available to 'em.

You know, obviously crop insurance whether that's multi peril revenue protection or whole farm insurance are two options that at least limit the downside for operations.

Also, working with a team of advisors, you know, whether that's your agronomic advisors, your crop insurance agent, your lender or banker, any financial advisors that you utilize in addition to your marketing advisor. So it takes a team to run a farming operation right now.

TJ Wilson:

And especially in the volatile times that we're in right now, it takes all hands-on deck and a lot of intelligence farmers have enough on their plate to have to deal with every day and managing their operation.

That bringing in some experts will definitely help limit the downside of that operation. And looking at where you're at day-to-day with the ups and downs in the market and the ups and downs of the expense side of things with all the inputs, you know, reevaluate once a month you know, see where your operation is, see where your marketing plan is, see how your budget has adjusted based off of what's going on in the market today.

Sunday Mancini:

All right. So as we sort of look at projecting expenses for farmers as they approach the next year what are some of the key components of projected expenses?

TJ Wilson:

Yeah, on the expense side of things, that's a little bit, you know, where we're at right now, that's the hot topic. So expenses continue to rise across the board. I know we did a supply chain video here last week, I believe that talked a little bit about the supply chain and what's, what's causing some of the increase in the expenses and when that may end.

It doesn't sound like that's in sight anytime soon. So when you're looking at the expense side of things, you know, two, I always say, or one, I always say, guess high.

You know, if you're gonna make an estimate, always, you know, build in plenty of cushion when you're looking at that. Make sure that you handle your, your key components to your operation.

You know, the seed, chemical fertilizer, those main inputs that you have to go out and buy every year, and you have to deal with on an annual basis.

TJ Wilson:

So make sure that you lock those down. As far as knowing where those prices are obviously rent is another big component there if you have to rent ground knowing what your land costs are. So when you're looking at that by this time of year, a lot of people have their prices locked in or have a very good idea of what they are.

So use those actual expenses and use a little bit of cushion for overage that you may have if you don't have it on already. Or you have to make any in-season decisions to, you know, add some fertilizer to those crops and try to increase that yield.

So looking at those types of things, make sure you're building a little bit of cushion there. Also look at, you know, starting with what you have last year, you know, what did you spend on chemical?

TJ Wilson:

What's that gonna look like compared to this year? You know, what did you exp spend on repairs last year? Fuel everything across the board. As I mentioned earlier, you have the tax returns. Use those as tools when you're building your budgets going forward. Both on the income and expense side of things.

So the other thing that a lot of farmers don't take into account while they're looking at their budgets and don't build into their cashflow budgets going forward is their equipment costs their equipment costs and their overhead. You know, you want to get paid for your work.

You know, the farmers wanna make sure that they make a return for their time and their effort. Make sure you build in enough cushion so that you get a return to management for your operation or return to land that you own already. You wanna make sure you're generating a return for that and figuring your depreciation costs.

Obviously you're figuring in fuel and repairs, but are you figuring in what the cost is to replace those pieces of equipment? They're not gonna last forever.

So make sure you're building in some cushion there and building in plenty of wiggle room for yourself and your operation to be able to expand and make the decisions unique going forward.

Sunday Mancini:

What benchmarks should farmers use to evaluate their projected expenses?

TJ Wilson:

Yeah, there's a number of tools out there. So there's a few universities that have reports that come out annually that kind of talk about what the expenses are in the market for different parts of the operation.

And then when you come looking at a number of other things, use yourself as a benchmark, you know, what have you done historically? You know, what are, what have your operating expenses look like year over year? How do those compare to this year?

And then utilize the, the team advisors that we talked about earlier. You know, how does that compare?

Talk to your lender, talk to your banker, talk to your seed rep, your agronomic advisors, you know, whoever you're working with, and figure out what the norm is. You know, am I paying too much for this type of stuff?

You know, what's normal in the market? What's it been historically? Do I need to adjust my rates? You know, things like that that you want to take into account to make sure that you're meeting the budget criteria that you set for, and that you, you can accomplish the goals that you wanna reach for.

Sunday Mancini:

Awesome. And so, you know, this is a question I think that everyone can relate to. What steps can farmers take to reduce their 2022 expenses?

TJ Wilson:

Yeah, obviously that's a, a big challenge this year with the increase in prices that we're gonna look at, but this is more of a long-term topic as well. So what can you do year over year to be able to reduce some expenses?

When you're looking at building these things, obviously there's always a lot of fat in anybody's budget that they wanna make sure they build in.

So build a budget that works build a budget that make sure it has enough cushion and it still works, you know, if, if you're guessing your expense is high. And then figure out throughout the year are there things that you can make adjustments on.

Obviously, you know, the agronomic advisors out there they're gonna have a lot of information on whether that's variable rate applications variable fertilizer, variable rate seating, things like that, that will reduce costs overall.

TJ Wilson:

So those are definitely things that we need to be considering. Things that you need to be talking to your advisor team about to build in ways to reduce your costs reviewing your, your rental agreements if you have them out there taking a look at those, are there things that can be adjusted so that they're fair to both you and the landlord?

If you rent ground and just looking at little pieces of your operation, obviously repairs parts, everything goes into that operation, everything goes into that budget to be able to cut back certain expenses. It's not gonna be one major expense item that somebody can cross off their list when it comes to the, the agriculture operations. It's a lot of little things that you have to make adjustments on.

Sunday Mancini:

Yeah. Awesome. so another component for budgeting is the balance sheet. So can you give us an overview of that? What is a balance sheet for farmers?

TJ Wilson:

Yeah, obviously, you know, the cash flow is, is one part of your operation. When you're looking at that, you know, that's what you're looking at from year to year. You know, am I gonna make money or am I gonna lose money on this next year's crop?

And how am I gonna do that? When you're looking at a balance sheet, that's a look at a single point in time where you're looking at your overall financial health of your operation.

So the balance sheet is gonna be a collection of all of your assets and all of your liabilities, everything you own and everything that you owe. So when you're doing that, you're gonna build it in three different scenarios.

So you're gonna have what we call the current section of that balance sheet, which is assets and liabilities that are gonna be, you will either liquidate or that you will have to pay within the next 12 months.

TJ Wilson:

The next section of that balance sheet is gonna be the intermediate section, and that's gonna be the same thing, assets and liabilities, but that's gonna be more anything from 12 months up to around seven years. Depending on the type of operation it's gonna be assets that have about a useful life, life of seven years.

A lot of that's your cattle and equipment. The type of things that sit in that section of the balance sheet and vice versa. On the liability side, it's gonna be, you know, debts that have to be paid over that time period. A lot of it's term cattle loans, equipment loans sometimes pivots and things along those lines.

Vehicle loans that you're gonna be paying on. The bottom section of the balance sheet is what we call the long term section. It's gonna be long term assets and liabilities.

TJ Wilson:

This is mainly just real estate. So you know, we have a real estate, we have any other long-term assets that we own, whether that's investments or, you know, retirement accounts or things like that that farmers have versus mainly just real estate debt. So that's gonna sit on that long-term section of that balance sheet.

You know, on the current section back to that, you know, that's gonna be really your inventory, your cash so things that you're gonna be liquidating in the next year, whether that's prepaids or accounts payable on the liability side. So anything that you owe your vendors that you have to pay in the short term.

Sunday Mancini:

Awesome. And as sort of they, the farmer may itemize the different things that they'll need to include in the battle sheet, what should they include?

TJ Wilson:

Yeah, absolutely. So be as thorough as you possibly can. So obviously we want to include everything. It's a true picture of your overall financial health and it is a tool that we can look at year over year. I would highly recommend when you're preparing these balance sheets, try to do it the same time every year.

I know a lot of operations when I'm working with my customers, I try to sit down and do it January 1st. I encourage them, you know, if they sit down, they're watching football games on New Year's Day you know, try to look at your balance sheet a little bit and sit down and do that while you're watching football.

Now that way you have it timestamped and it's the same point in time every year and it's gonna be a good tool for you to be able to measure your success year over year.

TJ Wilson:

So when you're looking at what to include, include everything you possibly can you know, be realistic about what you're including though you know, make sure you have accurate inventory numbers, make sure you have fairly accurate debt numbers.

You know, try to include, you know, what do you owe who do you owe it to what are the interest rates? It's just a good review for every operation on an annual basis to sit down and look at, Hey, make sure I have my bearings about me.

I know what kind of assets I have, I know who I owe what to when it's due and how much is due because you're gonna use a lot of the components out of that to help build your budget for the next year as well.

So obviously when you're including your budget, you're gonna include what your debt payments are and any expenses that you have due over the next 12 months so that you can make sure you have an accurate representation of what that operation looks like.

Sunday Mancini:

Why is it important? What value do farmers see from it?

TJ Wilson:

Yeah, absolutely. So I mean, farmers, you know, are, are tricky individuals when it comes to, you know, the way you're looking at their overall financial health. So farmers are a lot different than other businesses.

Other businesses operate on, you know, the shorter sections of their balance sheet where it comes intermediate liabilities, they have a lot of machinery, they have a lot of cash and inventory. Farmers cash and inventory does, it's out there.

They use a lot of it because obviously they grow a big crop. But farmers balance sheet typically lies towards the bottom side. A lot of 'em have a lot of long-term assets.

Farmers are always, you know, real estate rich cash poor. So, and that's the common saying out there. So their savings account is their real estate, and so making sure that you've got enough equity in your balance sheet should you need to tap into that ever is a good tool to measure on an annual basis and especially with the volatility that we're seeing right now.

TJ Wilson:

So are there things in, in your balance sheet that you need to be thinking about and planning for? Just like we talked about with your goals earlier on? You know, what do you want to get your balance sheet to the point of what are your goals long term?

Do you want to hand real estate down to your kids? Do you wanna build a operation for the next generation? Do you wanna retire the next five years?

What does that look like? And so looking at your balance sheet is a good gauge and tool to tell you whether you'll be able to accomplish some of those things going forward.

Sunday Mancini:

Awesome. That's great. And I feel like helpful even for me. Maybe I need to start budgeting myself. Awesome. So I wanna talk through some terminology that I certainly would love to learn more about. And that is financial ratios.

So I'll go through some of those terms and, and hopefully learn something myself. Starting with a current ratio. What is it, what is its implications?

TJ Wilson:

Yeah, we talked about the current section of your balance sheet a little bit bit ago. So that's gonna be that top section of, you know, the, the inventory and liabilities that are all due within one year or can be liquidated in one year.

So what does that ratio mean? What does it look like? So basically it's just your current assets over your current liabilities. So do you have more current assets than you have current liabilities?

That's the key component right there. So we call that the working capital position and the current ratio. So typically we wanna see a current ratio, obviously over one.

We wanna make sure that you have more current assets than you have current liabilities so that you have enough inventory, cash or anything on hand to be able to pay all your debts that are due within the next year.

TJ Wilson:

So obviously with the, the farmers, they have an annual crop, so they're gonna be generating cashflow all the time when it comes to that thing.

But is there any point in time where they do not have enough on hand to be able to pay what they owe the next year?

So that's something that a lot of lenders and a lot of bankers sit down and look at. That's a key component when they're doing their analysis.

So obviously the higher the number, the better. You know, the general guideline is, you know, about 1.25 to one.

So we want to make sure that you have, you know, at least 25% more assets on hand than you have of any liabilities due in the next year. So this is, you know, major cushion.

It allows a lot of operations to do things they need to do on an annual basis with the, what we've seen in the the volatility of the input prices this last year, being able to react quickly when you get the opportunity to buy something that you feel is a fair price or that you've been offered to make sure that you can take having that cash on hand or having a good working capital position allows you to do those things.

TJ Wilson:

So farmers need to definitely take a look each year what is their working capital position. That's a key component they wanna look at when they're doing their balance sheet and doing their cash flow on an annual basis.

So if you do have times like we see right now where you have high input expenses and you might see a negative cash flow over the next year, that's not the worst thing in the world as long as you have enough working capital to survive.

You know, farmers have been through tough times, they've been through tight times. Do they have enough equity on their balance sheet and enough working capital on hand to be able to to stomach a tough year.

Sunday Mancini:

Gotcha. so what is a debt to asset ratio?

TJ Wilson:

Yeah, the debt to asset ratio is very similar to the current ratio, but it takes the entire balance sheet into account. So how many assets do you have versus how many liabilities do you have? So looking at do you have more assets than you have liabilities?

Most farmers do, obviously they have a lot of, you know, high dollar assets with the real estate and the equipment that they have on hand. So what does this balance or this ratio really tell us? It tells us what the viability of that operation is long term.

So if you have plenty of equity in your balance sheet you can stomach a tough year or two, you know, you have the ability to work through any tough times that come ahead.

And it means that you're basically building your retirement account. So the more equity that you have in that operation the more flexibility it gives to your operation the more viability it gives to it long term and gives you a lot of options to do what you want to do, do, whether that's, you know, accomplish your goals, buy real estate, look at a number of different things that you're trying to do going forward.

TJ Wilson:

And it really tells a picture of the financial health of the operation.

Sunday Mancini

Awesome. Well I really appreciate you going through and answering all these questions for us. This has been super helpful and informative. But where can farmers learn more about financing through FBN?

TJ Wilson

Yeah, absolutely. So I mean, we have our website, fbn.com slash finance, so that's where they can go to our finance page, learn about the other products and services that we have available.

And we have a team of lenders standing by ready to talk to any farmer or operator that wants to, to go through some of these scenarios.

We've got a very skilled team very experienced to be able to talk through a number of these scenarios and work through balance sheets and budgeting questions that these farmers have on an annual basis.

Sunday Mancini

Awesome. Well thank you so much TJ, and this was great.

TJ Wilson

Thanks Sunday.

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