Revamping your farm budget for a new year

By Brian Ravencraft, CPA, CGMA, Principal- Holbrook & Manter

The turn of the calendar offers more than just a new season; it presents a crucial opportunity for financial reflection and planning. For farmers, a well-structured budget is the bedrock of a resilient and profitable operation. As you look ahead, the new year is the perfect time to evaluate your financial performance, adjust your strategy, and set your farm up for success. A thorough budget revamp helps you navigate market volatility, manage cash flow, and make informed decisions that will benefit your farm for years to come. Let’s look at some things you may consider doing:

Reviewing last year’s financial performance

Before you can plan for the future, you need a clear understanding of the past. A deep dive into your previous year’s financials is the essential first step. This isn’t just about looking at profit and loss; it’s about understanding the story your numbers tell.

Start by collecting all relevant financial records from the past 12 months. This includes:

• Bank statements
• Income statements and balance sheets
• Receipts for all purchases (seed, feed, fertilizer, equipment)
• Sales records for crops and livestock
• Loan statements and amortization schedules
• Payroll records
• Tax documents

Having everything in one place gives you a complete picture and ensures no detail is overlooked. This process helps you create an accurate baseline for the year ahead.

Analyze income and expenses

With your documents organized, categorize your income and expenses. On the income side, track revenue from different sources, such as specific crops, livestock sales, or government programs. For expenses, create detailed categories like inputs (seed, fertilizer, chemicals), labor, fuel, equipment repairs, veterinary bills, insurance, and utilities. Compare your budgeted amounts for each category against what you actually spent. This comparison is where you’ll find your first major insights.

Pinpoint variances

Look for significant differences between your planned and actual spending. Did fuel costs exceed your projections due to price hikes? Perhaps you spent less on equipment repairs than anticipated because you invested in a new tractor. Note every major variance, both positive and negative.

Understanding the “why” behind each variance is key. Overspending isn’t always a negative sign. For example, higher-than-expected feed costs might have been necessary due to a poor forage season but resulted in healthier livestock and better sale prices. Conversely, underspending on soil health or maintenance could lead to bigger, more expensive problems down the line.

Evaluate your spending choices

Ask critical questions about each area of overspending. Was the expense necessary? Could you have found a more affordable alternative? Did it contribute to a higher return? This reflection helps you distinguish between wasteful spending and strategic investments. Similarly, evaluate areas of underspending to ensure you aren’t cutting corners in ways that could compromise long-term productivity or safety.

Find ways to reduce costs

Look for practical ways to trim expenses without sacrificing quality or yield. This could involve:

• Bulk purchasing: Collaborate with neighboring farms to buy inputs like seed and fertilizer in bulk for a lower price.
• Energy efficiency: Conduct an energy audit to identify opportunities for savings, such as installing LED lighting in barns or upgrading to more efficient motors.
• Negotiating with suppliers: Don’t be afraid to ask for better terms or shop around for your key inputs. Loyalty is valuable, but so is a competitive price.
• Preventative maintenance: A regular maintenance schedule for equipment and buildings can prevent costly emergency repairs.

Once you take the time to make a thorough evaluation, you will be ready to set goals and your budget for next year. As always, involve your accountant in this process. If you set the budget together, you can monitor it as a team. As always, reach out to me with any questions you may have.