At this time of year, we often reflect back on how the past year went and begin making plans for a new year. As we plan for our farm businesses, one thing that can be helpful is farm enterprise budgeting. A question we often get in Extension is, “How much money can I make with (fill in the blank)?” It’s obviously a pertinent (and important) question, but one that very much depends on the planning, management, resources and even luck of an operation. Budgeting is one way we can begin to break down profit potential of a crop.
So, what is farm enterprise budgeting? It is the process of estimating costs and returns of individual crops you plan to grow for your operation. Extension publishes enterprise budget files for producers to use as they develop numbers for their operation. A budget will not be a precise calculation but is more akin to a plan and estimate of what will happen. It is useful to think of it as a guide with the understanding that things will change, including production costs and market prices. Because of this, we encourage producers to be conservative in estimating what they anticipate will happen. The process for a farm gathering their own numbers varies by operation. The overall goal is, when a farm pencils out a budget, the numbers weren’t just fabricated but are based on something in reality. A budget could show many different scenarios, but, to have any value, it must be based on anticipated real-life outcomes.
One of the main benefits of a budget is if we know how much the business plans to spend, we also have an estimate of how much revenue is needed for the business. If a crop’s profit potential seems very different from what we anticipated or it does not show a positive return on paper, those are situations to reevaluate to see if our calculations make sense. If, after reevaluating, the profit potential seems low, the producer would need to make a decision about whether or not that is something the farm will pursue that year. If the profit potential seems positive, again we may want to double check just to make sure the calculation is reasonable, but that is a good sign and may tell us to proceed with our plans. If a farm is undertaking several different enterprises, we encourage producers to think about the profitability of each one individually and then consider the overall plan for the farm. This is a process that would happen each year when the farm is dormant, when time and thought can be spent evaluating crops. The value over time is that numbers become more and more refined, and it can be compared to actual results on the farm. Keeping financial records for a business is a topic in and of itself, but it is how a farm can compare budgeted results to actual. When a farm has recorded results from a previous year, it is a great starting point for next year’s budget.
The reason we encourage producers to spend time on this each year is that finding a profitable mix of products is a year-by-year process. We may have successfully grown and marketed four or five different vegetables this year, but, if there was suddenly an influx of producers for those items, the profitability potential may have changed drastically. Budgeting goes hand-in-hand with our marketing plans. We want to anticipate and (to the extent possible) control our costs, and then determine which parts of the market will support it. We have the ability to produce a lot of different items, but finding the things we can produce, market and receive greater revenue than our expense is what we’re after. If we determine there’s a minimum price we must receive for our products, where will we find the buyers to pay that? Sometimes it’s right off the farm, the local farmers market, the local processor or sometimes it’s further away. Marketing further away could be the best option, but we must consider the travel, labor and other additional costs associated with it. We must consider what the farm is capable of at the present time. As you can imagine, each farm’s plan, products and management will be different (and they should be). We can look to others for ideas, knowledge and help, but, at the end of the day, it’s finding what is most appropriate for your operation.
Working with your local Extension agent can help with these items. Understanding budgeting and financial recordkeeping for a farm is one area where agents provide help. Additionally, there are numerous Extension meetings during the year where producers can gain new knowledge and information on successful production. Financial management and production practices must both be considered. Successful producers over time tend to make small incremental changes to their production and business management year after year. We hope for much success this next year and encourage you to contact your local Extension office for more information.