Building a Budget: Where to Start
We recently interviewed Leslie Hoover, Assistant Accounting Services Manager. A budget can be a valuable tool, helping to manage financials and make decisions. However, building a budget, whether it is for your home, farm or business, can be very daunting. Leslie discussed budgets and how to get started. Listen to the full podcast episode with Leslie here.
Let’s start from ground zero when it comes to budgeting. What is a budget, and how should farm businesses approach budgeting?
Budgeting is when we purposefully take the time to go through and estimate our costs, income and overall cash operations for our farm or even if it's not a farm, just your business. But it's really about being purposeful and taking the time to look at it.
When we are talking about budgets, a lot of times we talk about if it is a whole budget or a partial budget. A whole budget is taking a look at the whole farm and taking a look at every single income item, to every single expense or loan or check that's going out the door. When we're talking about a partial budget, maybe we're only looking at specific areas instead of the whole operation. Maybe you're really trying to take a look at your crop area instead of your livestock area.
When it comes to how you should approach it or how you should start yourself off, in an ideal world, we would all budget on a monthly basis. That means 12 times a year, we're taking a look at our cash ins and our cash outs and we're comparing what we budgeted to what we actually spent. Whether it's repairs seed expense, we're taking a look at what's taking place. Sometimes that gets a little complicated so maybe we need to start out a little lighter but monthly is that ideal basis that we're looking for.
Farmers are busy and budgeting often doesn’t fall to the top of the list, even if it is important. What tips do you have to help farmers get started budgeting?
Some easy tips to think about are start with what you know. Doing it on a monthly basis might not be the right way to go at first. Start by looking at the big picture and consider all those sources you have of income and expenses and fill in the major categories that you know. Maybe some of those major categories are your seed expense or all of your repairs. Don't feel like you need to break down every repair category that you're thinking of. What I mean by that is, say you're keeping track of your repairs for every tractor or your repairs for every truck that's on the farm, put it all into one category to make your life easier and start by just saying, "Okay, in repairs this is what we're going to spend each month or each year."
As an accountant, if I'm sitting down with a customer to do tax planning, I'm comparing year-to-year information. It's easiest when you aren't starting from scratch so that year-to-year comparison can be helpful and it gives you an easy and good place to start.
The other thing to remember is to be realistic. You want to be conservative when putting together a budget, especially for the first time. What do I mean by being conservative? Well, don't budget that you're going to have $1 million income when you're really nowhere near that. Be realistic about the income you think you'll make and be realistic about the expenses that you're keeping track of. Don't work to have a deficit in your budget. Make sure that you're being realistic again.
The other thing is don't be afraid to ask for help. Budgeting, record keeping, taxes, they're all things that are important to your operation but they're also things that you can get help for, whether it's your AgChoice loan officer, your AgChoice accountant, a member of a team of a dairy profit team, a profit team that you have for your operation. A lot of those professionals know a lot about budgeting and would be more than happy to help you because from our perspective and what you will learn in budgeting is that if you're taking the time to budget, you're taking the time to make your operation even better than where it's at now.
The other thing about budget is that they are not set in stone. It's normal to have to go back and tweak them pretty constantly. For customers that I work with who are budgeting monthly, we are going back pretty often and taking a look at them. That's common. It's really about creating a roadmap. That's what your budget is and that's the way you need to treat it. Sometimes a turn looks a little different than what it did on the map originally. Going back and adjusting is perfectly fine.
In an earlier question your mentioned partial budgeting. Explain a bit more about partial budgeting and how it is useful on farm operations.
When we're talking about partial budgeting, it can mean different things. Say we are partway through the year and we realize that we need to purchase a piece of equipment that has come up unexpectedly. We might need a new planter because the old one just isn't working for us anymore. If we take the time to run the numbers and figure out how to budget for that purchase of equipment, instead of maybe having them custom planted while your other planter or your old planter is out of commission, that's a partial budget.
Another common example of when you might use a partial budget is leasing or buying machinery or even of just adopting a new technology. Is it a better cashflow idea to lease the piece of equipment? Or is it better just to buy it outright? What does your tax accountant say about that? Because either way, there could be tax advantages or disadvantages to it.
Can you answer four questions when you are partial budgeting? Those questions are:
- What new or additional costs will be incurred?
- How much current income will be lost or reduced?
- What new or additional income will be received?
- What current costs will be reduced or eliminated?
All four of those questions are good to think about when you are looking at equipment purchases, building purchases or projects - something big that could have an impact on your farm. Partial budgeting can be just as beneficial if not more beneficial than doing whole farm budgeting because it makes you sit down, once again and purposefully look at your numbers.
As we wrap up, is there anything else you would like to share with our listeners about budgeting?
The only thing I'd want to share is just to remind people that it's worth taking the time to take a look at your numbers and see if you can come up with a budget. Whether it's a whole budget or a partial budget, sitting down and looking at those numbers is going to help make your farm even better than it is now.
< View All Blog Posts