Farm Budgeting

Budgeting is an essential requirement of any farm's management and is an integral component of overall farm planning.  While farm planning and indeed budgeting can and is as complex and sophisticated as one desires, generally speaking there are two types of farm plans: partial budgets and complete budgets. 

Partial budgets

Partial budgets are made when the changes under consideration affect only a small part of the farm business.  This form of budgeting can be sufficient when you wish to establish the impact of a small alteration to your farming system on your farm's performance and ultimately the farm income.  Likewise it is a useful and simple exercise to provide you with initial comparisons between different enterprises that you may be carrying on your farm.

Full Budget

A full or complete farm budget is a far more detailed exercise.  However, having gone through the exercise once, subsequent budgets are relatively straight forward processes and furthermore there are many farm budgeting/ planning tools and books that are available to assist you in their completion.

A full farm budget is necessary in the event of any significant change in the farm enterprise is planned. If you are taking over a new farm, considering a change/ expansion in enterprise, planning a significant capital expenditure, increasing farm borrowing, or planning any change that may have a significant impact on your farm finances either in cashflow or income terms, you should complete a complete budget.

In a complete budget the first step is to list the enterprises which are to be considered and on the basis of their gross margins to establish the expected return.  Estimated fixed costs are then deducted from the farm gross  margin to obtain the family farm income. In preparing this budget, crop and livestock plans for the entire farm must be made and total output, expenses and income estimated.

Two categories of information

There are two categories of information required to produce a rational farm plan or budget. These are:

1. Knowledge of the relationships between production and the amount of resources required at different levels of production, i.e. knowledge of production functions; and
   
2. Knowledge of input and output prices

Budgeting on Farms

A budget indicates the expected profitability of a business, and so whether, in the long term, the business will be capable of generating an adequate income and repaying its debts.  The cashflow forecast and the budget are complementary financial statements, which together indicate the ability of a business to remain viable.

Principles of the gross margin system

A widely used technique for budgeting in farming is the gross margin system. This is based on the following principles.

• Farming activities can be divided or categorised into different types, such as dairy cows, suckler cows, sheep, pigs, spring barley, winter wheat, potatoes etc.
• For each type of activity, there are some costs that vary in production to the level or volume of activity.  Only variable costs should be charged 'directly' to an activity in the farm budget. The nature of variable costs depends upon the type of activity involved, but might include seeds, fertilisers and sprays (for growing crops) and concentrates, forage cost, veterinary charges etc. for dairy farming.
• Each activity earns income. The difference between income and variable costs is the gross margin for the activity. If a farmer has an idea of the gross margin per unit - i.e. the gross margin per dairy cow, per ewe, per sow, per acre of spring barely etc he can budget his total gross margin for the period.

Estimates of 'standard' gross margins are available from Teagasc, so a farmer can readily cross-check the reliability of his gross margin budget estimates.  

Farm Asset Valuation

The assets of a farm depend on the size of the farm and on the type of farming carried out. You should be aware of the following 'physical' assets.

• Land and Buildings (land is likely to be by far the most valuable item in the balance sheet)
• Farm machinery, which should be valued at disposal value.
• Livestock - either breeding livestock or trading livestock, which should be valued at either market/ replacement value or at a cost value which includes any purchase cost in addition to the cost of inputs consumed.
• Crops which are still in the process of growing. These are usually valued at the cost of variable inputs consumed to bring them to their current state.
• Crops which have been harvested, but not yet sold which should be valued at market value.
• Crops which have been harvested and are being kept for consumption on the farm. Such as animal feed, silage and hay. These will be shown in the balance sheet of the farm.
• Stocks of fertilisers, seed, purchased feed, pesticides etc.

A farmer's balance sheet will also include financial assets and liabilities, e.g. debtors, creditors, cash or bank overdrafts.  

Cashflow Budgeting

Cashflow is the money being paid out by a business and the money being paid into the business.  Cash is the lifeblood of any farm business and the careful management of your cashflow is critical to your business's survival.  In a 'perfect world' cashflows would be predictable, but in reality and especially in farming, they seldom are.  Therefore, cashflow budgeting should involve a sensitivity analysis in which the impact of different variables can be accessed e.g. impact of a 10% increase in output prices.

Cashflow budgeting should schedule all the cash inflows and outflows expected over the course of your planning horizon.  Normally a three year horizon will suffice but if say you are performing a cashflow analysis to assess the impact of a five year plan then the cashflow should be done for five years.  It is very important particularly in farming in view of its seasonal nature, that cashflow budgets are done on a monthly basis.

Cashflow budgeting will alert you to any possible cashflow shortages that may occur over the course of the planning horizon.  Such shortages however short lived can be fatal for your farm business and will be shown up in the other budgeting statements such as an income and expenditure etc.

Farm cashflow planners can be very complex but a simple one can be adequate in itself or indeed can serve as a useful summary tool in budgeting.

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