No farmer needs to be told that farming is a job for those with grit. But of the many tasks around your farm or ranch, one that often falls through the cracks is farm budgeting. The budgeting process is an essential part of farm management.
At FarmRaise, we recognize that establishing doable financial goals is a key step toward profitability for your farm business. You don’t have to have a degree from a department of agricultural economics, but you will need to crunch some numbers. So we’ve created a guide to help you keep your expenditures under control, estimate the costs of your production practices and help your farm planning and decision making. Let’s start developing a solid agricultural budget together!
One of the most common reasons farms fail is due to poor business management and lack of budgeting. Budgets can keep you from spending unnecessarily and help you accurately file taxes.
So why do so many producers have anemic budgets or no budgets at all? We polled our FarmRaise Community and learned that most producers we work with are stumped by expense tracking. (If you’d like to participate in FarmRaise Community polls, get our newsletter delivered to your inbox with a free FarmRaise membership.)
Many farmers don’t create financial plans which hinders management decisions. Budgeting does take a commitment. Not only do you need to find a few hours to sit down and crunch some numbers, it also requires you to commit to tracking expenses throughout the year and make some tough decisions.
But it also makes it easier to know what agricultural practices you can afford and to apply for funding from the government - a process we specialize in. So let’s go over the types of budgets out there for farmers so you can choose the right one for you.
There are four types of budgets that farmers and ranchers should consider.
Most of these budgets have financial components that overlap with each other, so you wouldn’t need to start from scratch if you want to draw up all four budget types.
Let’s start with a cashflow budget because it’s the one that most lenders or grant programs will want to see when they consider your application for funds. Cashflow budgets are different from other budgets in that they have a chronological element to them. That means it keeps record of your receipts and expenses and when those expenses occurred. Usually the production period for these budgets are monthly.
A cashflow budget will examine whether you have the resources you need each month. To get started, track your income, resources and expenses for a month or two. This will help you estimate your future income and expenses.
Most farms are made up of multiple different enterprises which are the agricultural processes that result in products. Enterprise budgets are a great way to take a look at each aspect of your operation up close. These budgets generally list the input prices and resources (in units) you’ll be using for different enterprises around your operation. If you want to examine what it takes for your family farm to produce one pint of goat milk, this budget practice is for you.
Partial budgeting is a concept that helps you compare the results of any proposed changes around the farm. It only shows the increases or decreases in expected revenues and expenses. Partial budgeting can help you decide whether or not to adopt a new practice or hire a new person.
Over a one year period, a whole farm budget is arguably the most comprehensive budget of the four. It’s not as detailed as a cashflow budget, but it does summarize your farm income, operating costs, costs of production and other variable costs or additional costs for the year.
It’s always good to consider how you want to have your budget displayed on paper. So how do you determine which type of budget to create and follow? A great farm management system would create all four. But if you’re just starting out, we recommend a cashflow budget. It’s practical for short-term everyday use and it makes it easier for you to achieve long-term financial goals like applying for federal funding. It’s a twofer!
You’ll need two key financial figures to create a cashflow budget: net cash inflows (or income) and net cash outflows (expenses). And you’ll need to determine these for each month of the year.
Begin your cashflow statement with your incoming cash. When we polled the FarmRaise Community, this was the toughest part of budgeting. So let’s take this step by step.
The income section of a cashflow budget shows the amount and units of the products your farm produced and the price at which you expect to sell each unit. Feeling stuck estimating your yields and prices? If you already have sales, take the average of your past three to five years for each product.
If you’re just starting out with a new farm or farm product do a bit of research to learn about prices in your area. The more you pay attention to current events regarding your product markets, the better your estimates. You can also try testing out your income potential by collecting farm orders (and payments) ahead of time. This will make it easier to estimate a realistic income for you and offers the bonus of upfront cash in hand.
Be sure to only include on-farm income since this is the financial figure that most lenders and financial professionals will be interested in. You would only include off-farm income if you used it to pay on-farm expenses.
Use the previous year’s data to estimate expenses and income. If you have at least a year of farm operating transactions from 2022, use it as a solid starting point to estimate your profit and loss for 2023. If you’re starting from scratch, you’ll need to create your own benchmarks. Take stock of the expenses (which we list below) and give your best estimate of what you’ll spend based on your receipts from last year.
If you don’t have any receipts from last year, you’ll need to research expenses in your area. The USDA offers a comprehensive report on farm expenditures sorted by expense type, production type and total revenue.
You can use these numbers to benchmark your own farm but like any highly aggregated survey, know that these numbers may or may not fit your specific situation perfectly. Alternatively, you can do some Google surfing or ask other farmers in your area about expenses. One fast way to start this conversation is by joining an online farmer group and asking for advice.
To be safe, stay conservative with your estimates. Farming is often a guessing game when it comes to input costs like fertilizer or feed. That said, be conservative in your estimations. It’s better to estimate that square hay bales will cost you $10 a bale rather than $7 like it did last year. This gives you some buffer if things don’t go according to plan. And let’s be real - on the farm, things hardly ever do.
In your budget, you should list each of your variable costs and fixed costs in categories. Make sure to add some padding for unexpected expenses. Here are the expenses you should include in your cashflow budget.
On the farm, there are costs that change when production processes change. You can also call these operational costs. List your variable costs under your income section and group them by their stage of production and whether they are cash or non-cash expenses.
Variable, fixed, non-cash. Sound like a lot of new vocabulary words? Don’t worry. We’ve listed those expenses for you here:
Variable Cash Expenses (aka Operating Costs):
Variable Non-Cash Expenses (aka Ownership Costs):
Fixed costs are also called ownership costs. These costs will exist whether or not production occurs.
Fixed Cash Costs
Non-Cash Fixed Costs
Accounting for the seasonality and unexpected costs of farming is key. Ask yourself “how will these costs or sales change month to month or season to season?” Will you have enough cash in hand to front the costs of planting or purchasing livestock or inputs before you sell later?
Now that you’ve calculated your net* cash inflows (income) and outflows (expenses), you have what you need to calculate your net cashflow. It’s basic algebra:
Net cash inflows - Net cash outflows = Net cashflows
Voila! You’ve finished your cashflow budget.
*And just FYI, “net” is another word for the total remaining after all charges and expenses.
If you’re new to financial management and budget preparation, we’ve created a simplified cashflow budget table for you to start out with. Once you’ve done the hard part (estimating your income and expenses) it’s easy from here! Remember that a cashflow budget will compare what you expect to happen with what actually happens on your farm throughout the year.
The example we’ve provided here is a great start, but it’s likely not reflective of your specific operation. Feel free to copy and paste the table into a document or spreadsheet and input your own numbers. If you prefer to budget with a pen and paper, draw up your own table based on this example.
If you’re ready to make a more detailed cashflow budget, try the cashflow budgeting tool from the University of Wisconsin-Madison.
Once you’ve projected your annual costs and inputs, it’s time to start tracking them in real time. Manually creating a cashflow budget may not be realistic for your given your time and resources. That’s where budgeting apps come in.
As you might have guessed, there aren’t a lot of farm-specific budgeting software out there. A lot of farmers give Quickbooks a shot. We’ve given a full review of how Quickbooks checks out for farmers.
We had a hard time finding farm budgeting software that helps prepare farmers for funding applications or filing for taxes. That’s why we created FarmRaise Tracks, an app that lets you track all of your expenses in real time. And here’s a bonus: unlike other apps, it works offline for those farmers who don’t get adequate signal out in the field. If you’d like additional support from FarmRaise team, check out FarmRaise Premium.
Budgeting for your farm can sometimes feel like a full-time job, but the more you practice, the quicker you’ll get at crunching those numbers. You’ll find that budgeting can offer you a realistic picture about your financial prospects. Happy budgeting!
