Budgeting basics: Every successful farm has one

A comprehensive and all-inclusive budget is critical to the success of any production operation, according to Anche Suurd, an agricultural economist at NWK. Without this basic financial tool, it is extremely difficult to obtain a clear idea of the actual performance of the business, or sustainably create and build wealth.

Budgeting basics: Every successful farm has one
A monthly budget should contain a list of variable costs, such as fuel. This may change from month to month, depending on the season. A farmer’s fuel cost is likely to be much higher during planting and harvesting, for example. Photo: Yvonne Huijbens
- Advertisement -

A budget is an estimate of revenue and expenses over a specified future period and is compiled and re-evaluated regularly. It is a vital tool for any business, including a farming operation, as it enables management to take full financial and economic control. A budget thus underpins the liquidity and solvency of the business.

A difficult yet necessary exercise
If you are like many farmers, you may find that budgeting is a challenging process, especially with decreasing profit margins, increasing input costs and South Africa’s currently constrained economy. But this cannot be an excuse for avoiding the exercise; indeed, it makes it even more imperative.

Alternatively, you may be hesitant to conduct a formal budget, preferring to make a rough-and-ready estimate on a slip of paper. Unrealistic expectations and worry can also make it a challenge to sit down and commit a proper budget to paper.

- Advertisement -

Yet a budget can actually help you address these emotions, as it will paint a true picture of the business and be a guide to managing difficulties and creating solutions.

To achieve this, however, you need to include all aspects of the business (instalments, interest, private expenses and debt) in your budget. Without a comprehensive budget, it is virtually impossible to get a clear idea of the financial situation of your operation, and create wealth in the long term.

It is also important to involve your family in budgeting for the new production season in order to prevent overspending later.

Your farming budget should be followed by a cash-flow budget. This is an estimate
of all cash receipts and expenditures expected to occur during a certain period. It will enable you to keep track of all expenses and income for the next production season, and help you plan accordingly.

Income and expenses are usually estimated for a period of 12 months, and a budget allows for the precise allocation of expected funds. Any financial plan should be based on as much information and data as possible, so take care to incorporate all possible role players, such as commercial bankers.

Remember that debt, too, should form an integral part of planning. Stipulate your debt (if any) meticulously, including interest paid on it; this is of great consequence, particularly in the case of carry-over debts from previous seasons.

Cutting costs
The ultimate objective of a budget is to cut costs without harming the viability of the business. It will therefore benefit you to keep track of the latest agronomic, technical and technological developments in grain production in the quest for a profitable and sustainable operation.

Don’t accept input prices at face value; negotiate for better prices. The most expensive product is not necessarily the best. Shop around and compare prices; this could make a major difference to your budget.

When preparing a budget, calculate both your variable and non-variable costs. A variable cost is an expense that changes in proportion to production output. Variable costs rise as production increases and fall as production decreases.

Non-variable fixed costs, such as lease payments, utilities, insurance, salaries and interest on debt, usually stay the same. Variable and fixed costs are added to form a single total.

Your budget should obviously also include all expected income.

A monthly budget for a maize production operation, for example, should include all variable costs such as electricity, seed, fertiliser and fuel (see table 1).

Make provision for possible price increases or decreases, as well as for unexpected financial outlays. A well-planned budget will make it relatively easy for you to analyse all the various branches of your operation and determine whether cross-subsidising is taking place.

Exchange rate, expected climatic conditions, supply and demand, and movements on global markets are also factors that can affect profitability. Be sure to provide for any negative effects that these may have on your operation.

Cash flow
The cash-flow budget will help you take care of your business’s short-term financial responsibilities.

To repeat: a cash budget is an estimate of an operation’s cash flow over a specific period and is used to assess whether the business has sufficient cash to continue operating profitably.

You need to monitor and revise your cash-flow budget regularly until it reflects the true picture of what is happening on a farm. Remember to include all financial aspects of the business in this budget.

A cash-flow budget will help you identify poor financial decisions and make changes in good time. It will also give a clear idea of the direction the business is taking and allow you to make monthly financial comparisons.

Scenario planning
After preparing a cash-flow budget, do some planning based on a range of possible economic and financial scenarios, such as increases or decreases in product prices and rising input costs. Such changes could have a marked effect on the profitability of the business.

An extended cash-flow budget like this will help you make amendments and change direction as and when needed. Keep a keen eye on the markets and adjust your plans accordingly.

Don’t chase commodity prices at all costs; prices that increase rapidly could just as rapidly take a downward turn. Act on a price that will benefit your business, and do so in good time.

A final point: proper, comprehensive budgeting and planning is crucial for all farming businesses, regardless of their size or complexity. No matter how small your commercial operation, you need to budget!

Phone Anche Suurd on 018 633 1157, or email her at [email protected].

- Advertisement -