Budget Basics For The Year Ahead

Forecast realistic costs and expenses to increase financial performance—and evaluate new opportunities. ( iStock.com )

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 keep track of the money flowing in and out of your business, which is critical in a volatile environment, says Alan Grafton, director of K•Coe Isom’s AgKnowledge.

“Accurate financials not only reveal what you’re spending or earning but they also allow you to develop a marketing plan and make it easy to provide your lender with precise numbers,” Grafton says.

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 accurate projected numbers,” Hoskins says. “Also talk to your grain marketer for realistic numbers to use on a per-bushel basis for commodity prices.”

Structure your budget, especially on the revenue side, on a field-by-field basis, he 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.

The budgeting process can be stressful. Involve your farm’s key stakeholders and your spouse, Hoskins says. “It’s important for everybody to be on the same page.”

Maximize your advisers’ expertise, too. Be upfront with them and ask for guidance, input and feedback to sharpen your management skills, Hoskins suggests.

“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 tactical; it’s about what you’re going to do this year,” Gunderson says. “Use your budget to evaluate new opportunities. A lot of folks have made strategic cost cuts, but this is also the environment to make investments that can improve the long-run success of your farm.”