Forecast realistic costs and expenses to increase financial performance
Your 2019 budget will be littered with mistakes. You will overestimate costs and maybe underestimate revenue. Your expectations for yields might be off by 30% and you might end up switching a chunk of your acres to a different crop.
“Of course, your budget will be wrong, but you should do it anyway,” says Michael Gunderson, Purdue University ag economist.
What is the common denominator of a profitable marketing plan, decisions grounded in fact and reduced financial stress? A thorough and regularly updated farm budget.
A budget helps you keep track of the money flowing in and out of your business, which is critical in today’s volatile farm environment, says Alan Grafton, director of K•Coe Isom’s AgKnowledge.
“Accurate financials not only reveal what you’re spending or earning,” he says. “They also allow you to develop a marketing plan and make it easy to provide your lender with precise numbers.”
Review Mirror. The end of the year is a smart time to assess last year’s financial performance, Gunderson says. “Use that as a springboard for your 2019 budget.”
Once you have a good handle on your historical costs and revenues, gather the best information to generate realistic 2019 numbers, recommends Alan Hoskins, president and CEO of American Farm Mortgage.
“Reach out to your providers and ask them for their current forecasts so you are using good projected numbers,” he says. “Also talk to your grain marketer to find what kind of realistic numbers you should use on a per-bushel basis for commodity prices.”
Structure your budget, especially on the revenue side, on a field-by-field basis, Hoskins says. This will help you have a true picture of which fields offer the most profit.
Factor in your family living expenses. “Producers forget to include it because it’s not a direct component of production, but it is something the farm has to fund,” Hoskins says.
A Team Approach. The budgeting process can be stressful. Involve your farm’s key stakeholders, as well as your spouse, Hoskins says. “Everybody being on the same page is a really important aspect.”
Maximize your advisers’ expertise, too. Be upfront with them that you know you need to sharpen management skills, Hoskins suggests. Ask for guidance, input and feedback.
“If farmers come in with a budget, it tells me they are truly active in managing the business as opposed to the inverse, where the business manages them,” he says.
A current look at your costs and revenues will help you identify categories where you can reduce your cost of production. It will also help you see opportunities.
“The budgeting process is very tactical; it’s about what we are going to do this year,” Gunderson says. “After harvest, take a breath and think more strategically about your farm. Use your budget to evaluate new opportunities. A lot of folks have made strategic cost cuts, but this is also the environment to make strategic investments that can help improve the long-run success of your farm operation.”
Join Top Producer at the 2019 Top Producer Summit, which takes place Jan. 15–17, Chicago, Ill., and includes the Top Producer Seminar, Executive Women in Agriculture, Tomorrow’s Top Producer and Legacy Project Conference. Learn more and register at TPSummit.com.