Resources to Help Producers Develop Budgets

by: Lynn Kime, Senior Extension Associate

Creating budgets is a chore most people do not enjoy. If you are currently producing a crop, the task may be somewhat easy but still takes time.  If you are entering agricultural production creating a preliminary or pro-forma budget can be a difficult task. Budgets are a valuable tool to all producers and beginning producers as well. If you have been producing a crop for years and you cannot seem to determine how profitable that crop is, an enterprise budget helps make that determination. For beginning producers, producing a crop that only provides income to cover direct costs means that eventually your fixed assets (land and equipment) will be depleted and you can no longer stay in business.

For existing producers, to create an enterprise budget you will rely on your current records. The budget unit may be per acre, per bushel, per head, or another common unit. Whatever you choose, consistency throughout the process is critical. You need to determine what expenses were dedicated to that specific crop or enterprise. This will take some time to separate these expenses from your totals. For example, you determine that you purchased $2,000 worth of seed for this growing season; the problem is that you planted corn, soybeans, and oats. To determine how much you spent on the oat seed you need to look through your invoices and make that determination. This example may seem elementary but you need to do this same process for all inputs including fuel, labor, and repairs just to name a few. These items are much more difficult to extract from total expenses.

When you have determined your direct expenses, the more difficult task of allocating fixed expenses to each unit begins. For example, you made the calculations to determine how much fuel you used per unit, now determine how much of your depreciation is allocated to the equipment and buildings needed to produce that crop. What is the cost of the land required and how much of your property taxes and farm owner’s insurance policy is allocated to this enterprise? These are not as easy to break out of the invoices.

For potential producers, these tasks are even more difficult as you do not have the current production year’s expenses to use. You need to conduct research to find these numbers. There are several places to start that have budgets and templates for your use. For agronomic crops, the Penn State Agronomy Guide has budgets for you. For horticulture crops, TheMid-Atlantic Berry Guide for Commercial Growers  and the PennsylvaniaTree Fruit Production Guide are available on-line for free and printed copies are available through you local extension office or may be ordered from: Publications Distribution Center, College of Agricultural Sciences, The Pennsylvania State University, 112 Agricultural Administration Building, University Park, PA 16802-2602. Phone: 814-865-6713. On-line at: http://pubs.cas.psu.edu. E-mail: AgPubsDist@psu.edu. All of these publications contain budget sections with a column labeled “Your Estimate.” This is where you enter your figures to customize the budget. The items listed are to make sure you consider all items needed to create the budget.

 

Another source of budgets for specific crops and enterprises can be found in the Agricultural Alternatives publications.  There is a link to a PDF file for easy printing on the web pages. There are also links to interactive PDF budgets included in the web pages. These budgets can be customized to your operation by completing the necessary research to determine your income and expenses and entering these figures into the appropriate cells and the file makes the calculations for you. There are cells for both income and expenses and you use your figures so the document reflects your enterprise. You may print this budget for your use. 

I encourage you to check out the web site and discover what the project has to offer. By using these publications and the included budgets you will be better informed about the time, capital, and equipment needed for the enterprise. All issues you need to consider when creating enterprise budgets or starting a new venture or enterprise.

Starting a Farm? Get Prepared!

by Lynn Kime, Sr. Extension Associate

When beginning any new enterprise, many decisions need to be made prior to planting or purchasing the first animal.  These decisions require research and developing an enterprise budget to be sure the venture will be profitable.  Depending on the scope of the enterprise, a business plan will assist with the decision making process, especially if this is your first venture into production agriculture.  To make the transition easier, think about what you have a passion to do.  Having a passion for the production makes the entire process more enjoyable.  A list of topics to consider prior to beginning include:

• Marketing
• Production
• Harvesting and storage
• Risk management
• Environmental regulations
• Where to find information

 Before beginning any production, you need to know if there is a market for what you plan to produce and where that market may be.  Another marketing decision is whether you are going to market wholesale or retail.  Wholesale marketing may be the easiest, but may not provide enough income to sustain your enterprise.  Retail marketing will take more time to develop as you will need to develop relationships with potential customers or find a farmers' market that has enough traffic to market you production.  One recommendation is to start small and grow into your market.

There are usually several production options for any livestock or crop you plan to produce.  For example, if considering producing beef cattle, will you raise grass-fed or a more conventional grain and hay program?  For horticultural crops, will you use plasticulture or be organically certified?

Do you have the time to produce and harvest what you plan to produce?  Even one acre of some crops requires 30-40 hours to harvest and many more to produce.  The production will need to integrate into your proposed schedule.  Also, will you need to store a portion of the crop prior to marketing and do you have these facilities?

Any production contains risk.  You are at the mercy of the weather, markets, and inputs that you cannot control.  There are insurance products you can take advantage of to help alleviate some of these concerns.

All municipalities have regulations that may impact your plans and production.  The first step for you is to contact your local municipality to determine if what you are planning fits into their regulations.  Another place to visit is your local Conservation District office to see if there are any environmental regulations that will impact your plans.

Penn State's Agricultural Alternatives publication series is an excellent place to start your research into a new venture.  There are now 64 publications in the series and we cover many topics targeting the small-scale and part-time farming community.  These publications are between four and twelve pages long and any topic covering production of livestock or crops has a budget included.  The publications are not in-depth production guides, as indicated by the length, but are designed to allow the reader to make a better informed decision about the potential of the enterprise.

We have an extensive listing of livestock, fruits, vegetables, and farm management publications.  The farm management publications cover business start-up, business planning, marketing, and risk management topics.  These should be viewed first when considering a new farming venture.  The information contained in these publications is necessary when starting a business.  They will guide you through the process of the new venture and provide the information to allow you to become successful.  There is also a section covering where to find much more in-depth information into the topic covered.

You can access these publications here.  There is a link to a PDF file for easy printing on the web pages that do not link directly to a PDF.  I encourage you to check out the website and discover what the project has to offer.  By using these publications and the included budgets you will be better informed about the time, capital, and equipment needed for the enterprise; all issues you need to consider when starting a new venture or enterprise.

Budgeting for your small business

Let’s pretend that you’ve just thought of a great agricultural business idea and you want to jump right into becoming an entrepreneur. This sounds great, but there are many steps missing in between the “great idea” and actually opening a business. One of those key steps is creating a budget. A business idea may sound great, but you can’t go anywhere with it if the idea isn’t financially viable. To assess the financials of creating a business (and maintaining it), you must create a budget.
The purpose of a budget is to carefully map out how you will spend your money (and how money has been spent in the past). What exactly should be included in a budget? Very simply, a budget should show where you will be spending your money. This may include rent or mortgage, utility bills, payroll expenses, supplies, etc. A budget is not a one-time creation, but a living, working tool that will help you plan for the future. If an unexpected problem arises (like a sudden increase in supplies), you should go back to the budget and evaluate how this problem will affect your profits.
The intention of a budget is not to intimidate you, so don’t make it so complex that you can’t understand it. Your budget should be specific so that you can see where you may be over-spending (or under-spending in the case of expanding your business), but it shouldn’t be so complex that you are spending all of your time and energy on it. For example, office supplies are an expense that should be included on your budget, but is it really necessary to calculate the cost of using 15 paper clips per week? If budgeting in general is not your forte, consult a professional. In a recent article on Openforum.com, author Trent Hamm suggests getting the help of an accountant. “The more eyeballs you get on your goals and plans for future spending along with your records of how you currently spend, the better off you are.”

Openforum.com article

Investopedia.com is a great resource for learning about budgeting and other types of financial planning for your business. In one article, they list 6 tips to help you create a budget that will help you plan for the future of your business.

Tip No.1: Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the IRS website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings. Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.

Tip No.2: Make a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc.

Tip No.3: Factor In Some Slack
Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money put away or coming in before expanding the business or taking on new employees.

Tip No.4: Look To Cut Costs
If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors.

Tip No.5: Review the Business Periodically
While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.

Tip No.6: Shop Around for Services/Suppliers
Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

Investopedia.com article

As an agricultural entrepreneur, how has budgeting helped you plan for your business’s future? Has your budget helped you realize an area you were over-spending or under-spending? Do you have any advice for those thinking about starting an agricultural business?

Some budget cuts can do more bad than good

In a recession, businesses of all types are fighting to stay afloat by reducing overhead costs, but what cuts are actually harming your business?

Many businesses reduce costs by cutting marketing and laying off employees. Is this the answer? The article "Basic Mistakes Retailers Make When Times are Tough" by Elizabeth Walker (seen on www.openforum.com) describes how a furniture store in Canada (The Brick) dealt with tough economic times.

To "save" money, The Brick severely reduced advertising and laid off hundreds of employees. Less customers visited the store and the ones that did stop in couldn't find an employee to ring up their purchase. Revenues dropped even lower until their new CEO, Bill Gregson, led the company in the right direction.

Gregson felt that very little of the company's problems were actually a result of the recession. He decided to hire back the employees, advertise more, and developed an agreement with the manufacturer to hold inventory instead of Brick warehouses to help prevent excess inventory sitting around. For the month of August, sales were up.

This is not to say that these practices will absolutely save you during a recession. As the author states, "We are saying that it's easy to 'cut off your nose in spite of your face' when you cut the very services that bring business in the door. Bottom line is: when the economy is bad is the time to increase your marketing and upgrade your service. Do so and you'll be way ahead when the good times are back."

Budget cuts article