Farm Budget: The Backbone of the Farm

We've said it before, your farm budget is the backbone of your farm. But farm budgeting and planning is more than just keeping track of expenses; it’s about creating a business map that ensures the long-term success and sustainability of your agricultural business. Whether you’re running a small family farm or a larger, commercial operation, understanding the financial health of your farm is essential for making informed decisions.

In this blog post, we’ll explore the importance of farm budgeting, the key components of a farm budget, and how to use this tool to grow your farming operation.

Why Farm Budgeting Matters

Farming is an unpredictable business. Weather conditions, fluctuating market prices, and changing input costs can have a significant impact on a farm’s profitability. But without a clear budget, it’s easy to become overwhelmed by unforeseen expenses or make decisions that aren’t the best financially. A farm budget helps your business in many ways. It gives you clarity on your business, helps you understand risks that might come up, and shows you where profitability and waste are in your business. It helps you understand your goals as well. It helps understand what you need to do to bring in to accomplish those goals. Overall, a farm budget helps ensure that your business stays resilient even in challenging times.

1. Predict profitability: A well-constructed budget allows farmers to predict revenue, plan for costs, and determine if their operations are financially viable.

2. Identify financial gaps: It helps highlight areas where costs may be too high or where income may fall short of covering expenses, giving you insight to make changes before it becomes toxic to your business structure.

3. Uncover the unexpected: A budget can provide a cushion by accounting for reserves in case of drought, poor harvests, or market fluctuations.

4. Improve decision-making: With a clear budget, you can make informed decisions about investments, such as purchasing new equipment, renting land, expanding your operation, or hiring seasonal labor. You have the data behind what you're doing, and that's smart business.
   

Key Components of a Farm Budget

To simplify things, a farm budget generally consists of two key areas: income and expenses. Within each of these categories, you’ll break down more specific items that are relevant to your operation.

1. Goals

A farm business plan is the first thing that you should write up-even before you write a budget. You have to have a plan to know where you're going! So, take some time to write down your goals and then work backwards from there to figure out how to get there.

2. Income

This is simply how much you bring in each month or year. Hopefully, your income is primarily generated by the sale of your farm’s products—whether that’s crops, livestock, or other value-added products. But there may be other income coming in, so that would be Net Income and would include money made off farm, like off-farm salaries, or money from investments, etc.

Your farm income is what is made from the farm. Here are some of those possibilities. This changes with your farm, and that's why your budget may change as well.

• Crop and Livestock Sales: Estimate how much you expect to make from each product based on previous sales data, market prices, and expected yields.

• Government Assistance and Grants: In some cases, farmers may receive subsidies, crop insurance payouts, or grants that contribute to their income.

• Other Income: This could include income from agritourism, on-farm events, or renting out a stall or portions of your property.
  

3. Expenses

Next, you will want to estimate your spending. Expenses are the costs of running the farm. These can be split into two categories:

• Fixed Costs: These costs remain the same throughout the year and aren’t tied directly to production levels. Those might be:

  • Property taxes

  • Land rental

  • Insurance

  • Loan payments

  • Salaries of full-time employees

• Variable Costs: These costs fluctuate depending on the season and the amount of production. They might be something like:

  • Seeds, fertilizers, testing, and pesticides

  • Livestock purchase, feed, or veterinary care

  • Fuel and maintenance for machinery

  • Employee labor costs, which may be seasonal

    
    

4. Investments

These are more infrequent costs or long-term assets like machinery, equipment, and other types of operational infrastructure. These expenses are a little more complicated since you might need to borrow money.

• Machinery (tractors, harvesters, etc.)

• Buildings and storage facilities

• Irrigation systems

• Livestock housing and fencing
  

5. Cash Flow Management

Cash flow is crucial in farming because expenses can be incurred at one time of year (e.g., purchasing seeds and equipment before planting season) while income may come in later (after harvest). A solid farm budget helps manage the timing of cash inflows and outflows to ensure you can cover expenses when needed.

6. Contingency Plan

We don't want to talk about when things go wrong, but it's important to have a plan for them if they do. This is the part of the farm plan where you prepare for unexpected costs to ensure the resilience of your farm.

Types of Farm Budgets

There are a variety of budgeting methods depending on your farming needs and how you prefer to approach your finances. The most common types include:

1. Farm Budget (The Whole Enchilada)

Take your whole farm and make a budget. Obviously, this is the most comprehensive type of farm budget, where you account for all income and expenses across the entire farm over the entire year. In our opinion, it’s a must-have for all operations.

2. Enterprise Budgeting

An "enterprise" is one part of your farm business. That means that this type of budget focuses on individual areas of your farm, like a specific type of produce or livestock within your farm. That might be crop production, a calf/cow operation, or some agrotourism you have planned. Having a budget in one of these areas helps analyze the financial wellness of that specific operation or "enterprise" and allows farmers to make decisions on whether to expand or reduce in that area. Sometimes it's just not bringing in money, and you have to let it go.

3. Cash Flow Budgeting

As the name suggests, this budget focuses specifically on tracking the cash inflows and outflows in your farm. It’s especially helpful to make sure that you can meet financial obligations at different times of the year.

3. Monthly Budgeting

You can probably figure this one out on your own, but a monthly budget is a financial plan that outlines the expected income and expenses for a farm over a whole month. It's even better if you fill one of these out for each month of the year. This is an excellent way to manage cash flow, make informed decisions, and ensure financial sustainability. The specifics of a monthly budget can vary depending on the type of farmif it's crop farming, livestock, mixed operations), but generally, it will include categories related to both income and expenses.

How to Create a Farm Budget

Creating a farm budget doesn’t have to be complex, but it does require time and attention to detail. Here are some components to get you started:

1. Past Information: Collect information from your past financials—tax returns, sales receipts, expense invoices, and bank statements. Identify all your revenue and costs. If you’re just starting, gather data online or from other farmer friends on expected costs and potential income sources.
   

2. Revenue: List all your revenue sources. Estimate how much money you expect to bring in from all your farm’s enterprises. This could include crops, livestock, agritourism, or government programs. You might consider researching yeild pr acre(if you're growing that way to find these estimates.)
   

3. Estimate Costs: Break down your expected expenses that you'll have, both fixed and variable. Be as detailed as possible, and don’t forget to account for seasonal changes in labor and material costs. It's also good to be conservative with these numbers so you don't have surprises. A smart practice is toound up for what you might need, don't forget that wholesale prices bring in less than retail and don't forget to account for you own time and labor cost.)
   

4. Investments: If you plan to buy any tools, new (or new to you) machinery, make repairs, or expand operations, factor these costs into your budget. These are infrequent purchases, but should be thought out ahead of time when possible.
   

5. Profit or Loss: Subtract your estimated expenses from your expected income. A positive balance indicates profitability, while a negative balance shows you’ll need to adjust your operations or seek additional income streams.
   

6. Review and Revise: A budget doesn't stay the same year after year. You need to add your own personality and flair to your plan. You should add what is important to your operation. It’s important to update it regularly as the market changes, as your goals

   change, and as the world changes.

7. Emergency fund: Having a safety net for unexpected costs is a very nice thing to have when you need it. A good rule of thumb is to set aside a portion of your budget for emergencies or unplanned expenses like price fluctuations, unplanned disasters, or repairs.

Budgeting Tools for Farmers

While manual spreadsheets are a great starting point, there are also a variety of software tools designed specifically for farm budgeting:

• QuickBooks for Farmers: This software provides detailed financial tracking and reporting, which can help with budgeting and tax filing.

  
  

• Farmbrite: An all-in-one cloud-based farm management software designed to help farmers of all sizes track farm income and expenses, as well as optimize crop planning, livestock planning, equipment management, and so much more.
  

• Microsoft Excel (or Google Sheets)

  While not specifically designed for agriculture, Excel or Google Sheets can still be a powerful tool for budgeting when used properly. With custom templates and formulas, farmers can create their own budgeting spreadsheets. This is best for farmers with a limited budget who prefer a DIY approach or who have simple financial management needs.
  

• The Good Farm Budget (by Iowa State University)

  This is a simple, free online farm budgeting tool developed by Iowa State University. It’s a great option for new or small farmers who need a basic budgeting framework.
  

• Xero

  Xero is a cloud-based accounting software for small businesses. It’s designed to help track bookkeeping and financial management.

Choosing the right farm budgeting tool depends on the size of your operation, the complexity of your finances, and your level of comfort with the software you choose. Create a farm budget with Farmbrite farm management software. You can use it for small or large farm operations.

Whatever tool you use, it's important to invest time in selecting and mastering the right tool so you can have a clear view of your financial health, help you make informed decisions, and enable you to steer your farming business toward greater profitability and sustainability.

Final Thoughts

Farm budgeting is the foundation of a sustainable farming business. It offers clarity, helps manage risks, and drives profitability. By dedicating time to carefully plan your farm’s finances, you can ensure that your business stays resilient even in the face of challenges. Regularly updating your budget will also provide a roadmap for growth, helping you make confident decisions on everything from crop choices to equipment purchases.

Remember, no farm budget is perfect, but having one in place is an essential step toward long-term success.

As always, Happy Farming!