Farm Budget Blueprint

Setting both personal and farm business goals enables us to deliver a meaningful farm budget.

Why plan?

In the past I’ve been guilty of saying I don’t have time to plan (or, even better, I have the plan in my head). I’m sure that I’m not the only one?
Lewis Carroll wrote, in Alice in Wonderland,
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Goal Setting

Creating your goal takes time and energy, but a well written Goal set a clear vision for the future.

A well-defined Goal will:

  • Set direction and priorities and define your view of success. This allows you to prioritize the activities needed to move towards your Goal.
  • Identify your objectives clearly. This way you’ll know what you should be working on and the order in which it should be done.
  • Simplify decision-making. Decision making is simplified as the first question to be answered is whether the proposed action moves you towards the Goal or not.
  • Send the right message. Most of us have an idea of where we want to go (our Goal), but this is often just in our heads. By defining, and recording, our Goal we are asking everybody around us to commit to the same vision.

 

Upside down thoughts

Rich vs. Wealthy

How many of us know the difference between being rich and being wealthy?
The definition can be explained mathematically by

Unfortunately, the definition of wealth is more complex than simply “How much you are worth” because there are many contributors to wealth that cannot be defined in monetary terms

If we only consider monetary wealth then we can adjust our wealth by increasing income, or decreasing consumption. It is also possible that we can grow our wealth directly.

Growing Income can be difficult and time consuming. To do so you need to grow your existing source of income or add new sources of income. Growing income may seem to be the quick fix but this often requires investing (time and money) to achieve this.

Decreasing consumption will have the quickest effect. (I guess that’s why “cost cutting” is so popular with corporations).

 

Stopping the Leaks (or Do More, Outsource Less)

Following on from the Rich/Wealthy discussion let’s take a different view of income and expenses.

For most of us the income from our farm sales all comes into our bank account. Let’s consider our bank account as a pot and the money as liquid in the pot. Our money pot fills up as we make sales and its all looking good.

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Leaky Bucket

But we discover that our money pot has leaks and money leaks out, as consumption or expense payments to others. (This reminds me of a song I used to sing to my kids – “There’s a hole in my bucket, dear Liza, dear Liza…. A hole”….)

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This graph is from a 2016 budget for Soybeans in the USA. The only item of this budget that isn’t a leak is “Margin over Operating Costs” which amounts to only 17% of Total Income. That’s a leak of 83%! (Based on 30bu/acre and US$9/bu.)

So 83% of cash inflow is lost to external payments. Making a profit is going to be difficult.

We raise broilers (meat chickens) and by hatching our own day old chicks, producing our own feed, and selling our finished chickens live we’re able to get our leaks down from 81% (standard commercial method) to 0%. We have increased the amount of money that we get to keep from chicken sales from 19% to 100% (a 5x increase). We’re still working to achieve this for our other enterprises.

Please, remember I’m not saying that our chicken enterprise is costing us nothing (I wish) but rather that we’re not paying any cash out to third parties, it all stays on our farm to help build wealth.

While on the subject of stopping leaks I’d also like to introduce the concept of the “Multiplier Effect”.

In effect this idea says that money kept within a group as a greater spending effect that its actual worth.

Becoming a Producer instead of a Consumer

If you are a consumer, this means you are buying from other people.  I am saying, “become a producer” and make your own.  If you are currently buying feed, put a plan into place so you can grow your own.  The first year you will have to buy some seed but the year after that, keep 20% back to grow again.  The seed industry make so much money off you each and every year.  Stop this cycle!

If you currently buy your “day old chicks”.  Break this down into a plan to produce your own.  By being a producer, you control your money.  It becomes yours and not someone else’s.

Just by doing these 2 things on the farm, you’ll have plugged 2 holes already and get to use more of your sales money towards reaching your goal.

As a reminder just go back and take a look at the previous graph to confirm that commercial soybean production is more of a consumption exercise than a production one. The farmer only gets to keep 17% of the crop value to cover his own labor, all his fixed costs, land rental costs, and cost of capital.

 

What is Profit?

Accountants define profit as being the difference between the amount earned and the amount spent. This applies to businesses as well as wage-earners.

I don’t believe that farmers should consider this monetary definition as the basis for calculating profit as we also have other components of profit to consider. These include our lifestyle (social profit) and impact (environmental), plus all the other things we get while doing something we are passionate about.

This concept of a Triple Bottom Line has become a mainstream concept and been adopted by many corporates around the world. It can be summarized as 3P’s – People, Planet, Profits (and the good thing is that we don’t have to pay tax on the people and profits part of the calculation).

I recently read, on a permaculture forum, a response from a member saying that permaculture farms had no business making profits. I presume he was referring only to the idea of monetary profit and not to “people and planet”.

I take issue with this as, without money profits, we have no money resources to invest to get us closer to our goals. In fact, David Holmgren’s “Permaculture Principles” specifically encourage the profit incentive –

Principle #3. Obtain a yield – “You can’t work on an empty stomach” Ensure that you are getting truly useful rewards for the work you are doing

In the rest of this post I’ll refer to “Goal Fund” rather than profit. This way we can be clear that our planning objective is to farm in such a way that there are funds left over after all necessary costs have been paid. This “Goal Fund” can then be spent in a way that best helps us to move us towards our Goal.

Aligning your financial plan with your goals

Once goals have been set it is critical that the financial plan is structured to support your goals. Unfortunately, unless you’re a billionaire, it’s likely to take a number of years before you reach your goal.

It’s important to break your goal down into smaller bits to make it manageable. Take your final goal and break it down into annual goals, and then monthly goals within the year.

These monthly goals can then be broken into monthly task lists to keep everyone focused on the immediate actions needed.

5 Key Steps to Successful Farm Business Planning

 

1.        Annual review

Before developing the next plan it’s always important to review your current situation, starting with your current Net Worth statement.

Is this where you expected to be?

Planning should be dynamic. There is no point in setting an inflexible plan that can’t be adjusted. Plans need to be flexible enough to changing as conditions change. So the planning cycle should look something like this”farm budget

Before starting the new plan, you’ll need to figure out your current situation. This will be the starting point for your new plan.

Comparing your current situation to your goals you’ll know whether you managed to reach your Goal.

In your analysis you need to get answers to the following

  • Did we reach our financial targets? This will help you to see whether your current plan was realistic, and help guide you with your expectations for the new plan.
  • What went right? Can we expect the same again?
  • What went wrong? How can we fix these?

 

2.           Planning Income

The starting point of your new plan should be to plan your income for the next period. This will be the rack that the rest of your plan will hang from.

Firstly, take a look at your current enterprises. Your financial records should show you how they performed against your previous plan.

For each of your enterprises match planned income and costs against the actual amounts. You’ll need to ask the same 3 questions that you asked for the overall plan. Did we meet our financial targets? What went right? What went wrong?

For our farm overcome these issues by having only 1 enterprise (the whole farm) with multiple income sources and multiple cost areas. It also makes it much easier to incorporate shared costs (such as labor, fuel, and electricity) across all activities.

Once we’ve looked at the gross margin analyses we need to decide if we’re going to be making any changes for the new planning period. This is normally needs the planning team to have a brainstorming session.

Brainstorming needs to consider whether poorly performing enterprises can be fixed or need to be dropped. It also needs to consider whether new enterprises need to be introduces (after careful analysis, of course!)

Our next step is to finalize our enterprise mix and to complete the Gross Margin budget for the new period.

 

3.           Plan the Goal Fund

Traditionally, profit has been seen as what’s left after expenses (direct and overhead costs) have been deducted from income. Holistically though we should categorize our expenses so that they can be prioritized and managed differently.

We start our categorization by matching direct expenses to income as we saw in the previous section.

What remains is for us to categorize our overhead costs (also called indirect costs) that cannot be allocated directly to income.

In every small business training session, I’ve ever attended, I’ve been taught to “pay yourself first”. This is valuable advice since we are, in fact’ employees in our own businesses and deserve to be paid a fair wage. (Excuse me, while I laugh madly).

But, we’re working towards our Goal, and that must be our first priority!

So, the first “cost” we need to categorize and prioritize is our Goal Fund. We need to set aside as much money as we can to pay for things that take us towards our Goal. The Fund is used develop new capabilities for our farm – maybe we need more swales, new permanent fencing, or water storage ponds. These are all wealth generating activities which will benefit our farms for years to come.

The Goal Fund allocation can be affected by the other overhead costs, but our target here should be a Goal Fund of over 50% of Farm Gross Margin!!!

The other costs need to be categorized as follows

  • Debt repayment – It is acceptable to reduce the Goal Fund target in order to accommodate debt repayments if required but the Goal Fund target should never go below 25% of gross margin.
  • Unavoidable Expenses – These are expenses such as Land Taxes, and other legal and moral expenses that cannot or should not be deferred
  • Business building expenses – These expenses are wealth generating or “leak fixing” expenses to address bottlenecks or areas of weakness identified in the Step 1 (Annual Review).
  • Maintenance Expenses – These are the indirect expenses that are required to maintain the business without growth, such as accounting fees, telephone, salaries, repairs and maintenance. It is these maintenance expenses that must be the pawns in our game of “balancing the books”. A new coat of paint for the barn can be deferred more easily than a loan repayment. Likewise replacing a vehicle can also be put off till later.

 

4.           Create Annual Forecast

Once we’ve got our income, Goal Fund, and Expenses forecasted they need to combined into a single plan.

Next we need to develop the cash forecast for the planned period. The cash forecast is critical and we need to plan the timings of cash inflow and expenditure outflows. You may to “juggle” the numbers to come up with a plan that works and that meets the objective set.

We started off this planning cycle by taking a look at where we are today. After we’ve finalized the plan we need to calculate our forecasted Net Worth at the end of the plan. That’ll tell us where we expect to be at the end of the planned period

 

 

5.           Monitor performance!!!!!

The final step in this planning process is to record our transactions and monitor our performance against the plan.

Monitoring should take place at least monthly. If unforeseen situations arise (e.g. foot & mouth in the UK, or earthquakes in New Zealand) then adjust your plan to reflect your changed reality.

I started this document off with a comment about a bad plan being better than no plan but there’s no point in reporting against a plan that we know we can’t achieve.

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