What made you want to farm? It’s doubtful that you got into farming because of your love of financial record-keeping, but that is a key skill for any business, even your farm business. Keeping strong records of your farm’s financial situation can help you recognize opportunities for growth, identify practices that put your operation at risk, and make projections for the future.
The four elements of a strong financial plan are:
- Enterprise budgets
- Month-by-month cash flow projections
- A recordkeeping system that allows for an accurate Schedule F (i.e. profit or loss from farming) as part of the farm’s federal income tax return
- A balance sheet prepared at least once per year
Of these, enterprise budgets and cash flow are both forward-looking documents. They are farm financial planning documents that should be prepared well before the growing season starts.
The next element, a good recordkeeping system, needs to be used on a daily or weekly basis whenever economic activity occurs on the farm. You should track all revenues and expenses, family living draws taken from the farm business, capital purchases, loan payments, and any other financial transactions.
The fourth element, a balance sheet, needs to be updated annually at the end of each fiscal year. You can update it more often, though it is important to always update annually on the same date. This allows you to account for seasonal variations and provides a more accurate financial comparison from one year to the next.
An enterprise budget is a method of estimating all revenue and expenses associated with a given farm enterprise prior to beginning production. It’s like a mini feasibility study, providing a rough estimate of the profit potential of an enterprise. An enterprise budget for basil, for example, should reveal whether there is any potential to make money growing and selling basil.
An enterprise budget—or a set of budgets for a multifaceted farm operation—is a great first step in the annual farm financial planning process. However, no big decisions should be made solely on the basis of enterprise budgets. Your enterprise budget should feed into a more comprehensive month-by-month cash flow projection for the farm.
If you have been farming for a few years, enterprise budgeting should be a fairly easy endeavor for you. You can start with your actual revenues and expenses from prior years. If you are considering adding a new enterprise, there are several resources available for guidance. The resources below from Michigan State University and Pennsylvania State University can guide you through partial budgeting to determine the profitability of a new enterprise.
- Michigan State University – Evaluating the Profitability of Changes in Farm Businesses
- Pennsylvania State University – Partial Budgeting for Agricultural Businesses
The enterprise budget typically begins with expected gross revenue, which can be estimated in any way that makes sense for your enterprise. A conventional corn and soybean farmer typically projects revenue on a per-acre basis, whereas livestock producer will calculate revenue on a per-head basis. A small-scale vegetable grower may project the revenue expected from a bed of lettuce that is four feet wide by 100 feet long. A CSA grower may calculate enterprise budgets according to market outlets rather than individually for each of the fifty crops grown (e.g. expected revenue from 100 shares x $600/share = $60,000).
Gross revenue: the sum of all money generated by a business, without taking into account any part of that total that has been or will be used for expenses. As such, gross revenue includes not just money made from the sale of goods and services but also from interest, and sales of property and equipment.
Expenses in an enterprise budget are separated into two categories: variable costs and overhead costs. Your variable costs would be zero if you were not growing anything and include seed, feed, soil amendments, fuel, hired labor, and similar costs. These expenses tend to be paid periodically throughout the year rather than all at once.
Overhead costs are expenses that have to be covered even if the farm is producing nothing. These costs include property taxes, interest on a farm mortgage, property and casualty insurance, building repairs, and depreciation of equipment, buildings, and other capital items that rust, rot, or wear out.
You may sometimes hear overhead costs referred to as fixed costs. This is a bit of a misnomer, as these costs are not really fixed. There are some ways to lower overhead costs. For example, you could sell a piece of equipment that you do not use very much, which would both lower your insurance bill and reduce depreciation costs.
Once revenues and expenses are listed on the enterprise budget, your net profit can be estimated. It is important to remember that this is only an estimate of the profit potential of the enterprise—it does not reveal anything about the potential cash flow. To see the impact on the farm’s cash flow throughout the year, an enterprise budget needs to be expanded into a month-by-month cash flow projection.
Enterprise Budget Tools:
- Agricultural Marketing Resource Center – Enterprise Budget Tools
- Iowa State University Extension – Market-based Enterprise Budgets Toolkit
- Oklahoma State University – Enterprise Budgets
Learn more about enterprise budgets in the video below from Midwest Organic & Sustainable Education Service (MOSES). You can view the full Fearless Farm Finances playlist here. MOSES also has a suite of farm financial resources here.