How to Build a Farm Budget
Every day, farm managers face critical decisions that affect their operation’s financial situation. Selling crops, buying equipment, adopting a new production practice and purchasing inputs are just a few examples of choices influencing profitability at the year's end.
A farm budget can help farmers navigate this constant decision-making and weigh alternative options to increase farm revenue. It also allows farmers to meet short- and long-term operational goals and effectively forecast for their farm’s future.
How to Start Building a Farm Budget
A farm’s historical records are a practical starting place for building a farm budget. All farmers have tax returns indicating previous years’ income and expenses. They can create a baseline for next year’s budget using that information.
By the end of the year, many input costs for the next growing season have been locked in, allowing farmers to estimate the costs associated with crop production; farmers can use information about the quantity, price, method and timing of the inputs to fine-tune expected expenses. Next, use estimated crop price estimates to calculate the expected revenue potential.
Define Financial Goals
Every farm’s budget will look different based on the goals they’re trying to achieve. Farmers should consider what they hope to accomplish over the next season as they build the farm budget.
Is the goal to pay off debt?
Does the farm need more working capital?
Are risk mitigation and financial stability top-of-mind?
Does the farmer want to maximize income potential?
The answers to these questions will help guide budget creation and help farmers make financial decisions that align with their operational objectives.
Consider Worst Case Scenarios
Of course, most farmers want to be optimistic about the following year’s balance sheet. Unfortunately, it’s hard to predict how the market, growing conditions and global affairs might impact revenue.
For planning purposes, it’s a good idea to build out two budgets:
One that considers revenue based on average yields at high crop prices
Another that considers what a crop insurance payout could look like
Having best and worst-case scenarios calculated ahead of time can help lay down guardrails for the budget and help the farmer make decisions with sound numbers in mind.
Remember, the farm budget should be a working document adjusted throughout the season as situations and conditions change.
Create a Farm Balance Sheet
A balance sheet helps determine cash flow and whether or not the farm will make or lose money on the following year’s crop. It offers a snapshot of the farm’s financial situation at a specific time and should be updated annually, ideally at the beginning of each year.
The balance sheet should include all farm assets and liabilities and consider current, intermediate and long-term conditions. The “current” section of the balance sheet will indicate which assets and liabilities will be liquidated or paid within the next 12 months. Farmers should include any debts or accounts payable to vendors here.
The intermediate section will list any assets and liabilities that will be liquidated or paid 12 months to seven years from now. This balance sheet section may include items such as cattle, equipment and vehicle equipment loans.
The long-term section of the balance sheet should include assets like real estate and retirement accounts and long-term debts, including farmland loans.
It’s important to use accurate inventory and debt numbers to build the balance sheet so it is helpful for year-over-year comparisons.
Analyze the Farm Balance Sheet
After farmers create the annual balance sheet, they can begin to make assumptions about yearly cash flow using current ratios and long-term farm viability using debt-to-asset ratios.
The current ratio compares the farm’s existing assets to its current liabilities. This number helps determine the farm’s working capital position for the following year.
A current ratio over one is ideal because it indicates that the inventory and/or cash on hand is enough to cover the debts due within the following year. With a higher current ratio, there’s more financial cushion and flexibility to take advantage of market opportunities.
The debt-to-asset ratio reveals the operation’s long-term viability by comparing total assets to total liabilities. A higher debt-to-asset ratio indicates greater risk exposure for the farm and may limit borrowing opportunities or flexibility in responding to adverse situations.
The Farm Financial Scorecard, a resource from The University of Minnesota, indicates a strong debt-to-asset ratio is less than 30%, while a ratio greater than 60% may increase a farm’s risk vulnerability.
Flexible Financing Solutions from FBN® Finance
The more you know about your farm’s financial situation, the more profitable your operation will be. Budgeting can seem initially overwhelming, but it can be a manageable exercise that offers both immediate and long-term benefits.
Your farm budget helps you set fair expectations for the coming season, plan future operational growth and continue to prioritize ROI for your business.
Whether you’re trying to build more working capital with an operating line, want to expand your farm with a land loan, or aim to streamline operational efficiency with new equipment using an equipment loan, the FBN Finance team can steer you in the right direction with competitive, flexible financing solutions.
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