How to make – and stick to – a business budget
When it comes to budgeting for farm businesses, financial advisors say greater adaptability in managing variable income, carefully consideration of what constitutes a true farm expense and financial clarity can all go a long way.
Start with clear parameters
For Darrell Wade, founder of Farm Life Financial, an advisory and farm-planning firm based in Peterborough, Ont., transition planning provides a good opportunity for both incoming and outgoing generations to understand the parameters in which they must operate.
Budgeting for both parties, that is, starts with sharing a clear cash flow statement. That statement can then be compared to lifestyle expectations, projected changes in expenses and other variable factors to determine what is required to stay profitable.
“The only way it will work is if there is clarity on the financial side,” Wade says. “It’s not about what we make from an asset, it’s what we keep.”
Separate personal and farm expenses
Stephanie Holmes-Winton, founder of Cacheflo, a Halifax-based financial technologies company specializing in spending management, says many farmers hit budgeting barriers because they don’t adequately separate true business expenses from personal and family ones.
We tend to tighten our spending when times are lean, but don’t always pay debt back when times are good.
A true farm expenses, for example, might include a payment for a combine or tractor. A payment for a new and perhaps less-then-necessary pickup truck might not qualify. This sort of expense can easily overextend a family when it doesn’t have to, says Holmes-Winton. The stress is less likely if the expense is paid for with personal income.
“If you just have a big loan on the entire property, a portion is technically your house. You can estimate how much the mortgage payment would be and take it from your salary,” Holmes-Winton says, adding the salary can also be taken as an expense – just like fuel, feed or “anything else you would need.”
“We tend to tighten our spending when times are lean, but don’t always pay debt back when times are good,” she says.
Cost-breakdown
The variability of year-to-year farm income can make budgeting even more challenging, says Lise Deleurme, an accountant based in Notre-Dame-de-Lourdes, Man. For this reason, sticking to a pre-established budget isn’t always desirable.
Indeed, it might be necessary to, for example, reduce investment plans in order to reduce potential variability. That could result in planting a crop that brings less overall revenue but is more likely to succeed despite significant weather challenges.
Because profitability is partially determined by initial costs, Deleurme reiterates it’s important to know costs per acre or hectare, as opposed to just a general idea.
“It’s definitely an area I think people need to work on a little more,” Deleurme says.
Bottom line
Sticking to a budget can be tough, especially in a farm operation. Financial experts advise managing the farm budget by having a clear cash flow statement, removing personal expenses from farm business expenditures and building flexibility into the farm management plan.
Article by: Matt McIntosh
Understanding the farm business value is useful for more than just sale situations. Financial experts say both general assessments and more in-depth business valuations are practical in multiple ways, including developing tax and transition plans.