No Budget, No Business
Negative cashflow is not sustainable and you cannot manage cashflow without a budget.
June has come and gone and with it, the first six months of 2023. They were chaotic here at our farm. It’s now August and it’s taken a whole month just to sit down and write something. We had to make some serious changes and adjustments. Through it all, there was one thing we kept revisiting over and over, our budget. These decisions had impacts on all aspects of our lives, and our business including our financials. Mid-year is a great time to check in and make sure that your farm business is still operating in a financially sound manner.
This means updating your financial records and your budget. Market outlooks and weather situations are constantly changing which means your farm business has to stay ahead. Without a budget, you are operating in the dark, especially when you are not updating your bookkeeping regularly. Your bank balance is not your budget. That’s an entirely different number on which you should never base your spending.
You Need a Budget
You can not operate a business without a budget. A successful farm is a business. And if you think you can operate without a budget, the person preparing your taxes definitely said “WTF?!” at least once this spring. It’s quite apparent when records are not kept up to date, sorry if that’s news to you, it was a hard tax season. I’m not going to discuss taxes and the 101 ways farmers have come up with to minimize their tax bills today. That would be a whole different post for another day.
A budget is a document that calculates an estimate of income and expenditure for a set period of time. It is always written or printed. If it’s in your head it’s a guesstimate. Most commonly a budget is designed to ensure enough cash is available to meet a business's financial needs. It’s done to make sure you are not operating in negative cash flow It can also be for a quantity of material such as feed or building supplies.
Budgets can have a variety of timelines from yearly to weekly and project specific. Project-specific is likely the best way to illustrate the why and how of budgets. We will use building a barn as an example.
Starting Point
Let’s go with the barn project example. First, you need to determine what the barn design that you want to build is going to cost you. Then this gets adjusted by how much you can actually afford. If you’re lucky, the 2 numbers agree. If not, you must adjust your project plans until they meet. I’ll use a combination of actual and adjusted numbers for this, we did build a barn in 2018 and we did use a budget. That means some of my costs are based on 2018 numbers, not 2023 numbers.
The original barn we wanted was 85’x200’; designed to house 400 ewes and lambs. A couple of calls to builders told us this project would run around $350,000 at the time for a basic build. This was more than we could afford, which was roughly $150,000. First, we cut the dimensions down. It became 79’x155’. Then we determined we would have to build the barn ourselves. Materials were increasing rapidly at the time, in fact, a 2x4x16 today costs less than it did in 2018 (I have the receipt). We set our budget firmly at $140,000 in the end as that was all the funding we could get. There’s no extension, no line of credit, that was the line in the sand. $140,000 was the budget. 100 days later we had a barn.
Limits
This is probably the hardest part for people to grasp about a budget, when you set that limit, that’s it. You do not go over it. You do not bend the rules a bit. You make it work. Whether that not installing lights for the first year or using $100 rolls of plastic for doors, you do not spend more than the allotted amount because reality is, you don’t have that money. Our barn wasn’t properly finished after those 100 days and still isn’t to this day but it’s a functional structure that lets us raise our lambs. There are no functional curtains and the end gates are still the pallets that the roof steel arrived on. That’s why you have a budget in the first place. Only in a situation where you have unlimited funds can you operate without a budget.
Everyday Budgets
A barn build is not an everyday item. Buying feed and repairing equipment is. So you need to know how much money is coming in and how much is going out. The money coming in needs to be greater than the money going out. If it’s not, you’ll run into a problem very quickly. While yes, there are tools like operating lines of credit to help you in the short term relying on them will cause a problem in the long term. You can farm without one, we’ve been doing that our entire farming career.
Step one is calculating how much you have coming in, realistically. Use real, actual numbers and it’s always safer to er on the lower side. You can revisit this article on revenue.
Next, you need to total up all of your regular fixed expenses including insurance, mortgage payments, utilities, fuel, etc. This number is probably not changing a lot from one month to the next. Deduct that from your cash inflow. It’s already committed, that money is gone.
Now calculate how much feed and other purchases you need for the month. Check the balance. If it’s below zero, you need to either bring more money in, have surplus money in reserves (typically money saved in prior periods) or you need to cut costs.
Whatever is left over at the end can either be carried forward to the next month or used for other expenses. For example, if I want to install overhead doors on that barn, I need to have the full extra cash set aside. It’s not coming out of the regular budget because I don’t need them. And when the remaining dollar is $0, there is no additional spending. There’s no Tim Hortons coffee, no takeout, no new tool for the shop.
Hold Firm
If you can’t follow a budget, then the next couple of months (or years, depending on the economic forecast you read) might get really rough for you. At a prime interest rate of 7.2%, there’s no room for error or unnecessary spending. This might be harsh, but it is the biggest mistake I’ve come across regularly. “Oh it’s a bit over budget but we’ll make it work.” No, you will not. You have only two choices in that situation, which are to take the funds from another area of your budget or borrow the shortfall. Sooner or later this will catch up with you. So unless you’re opening your spreadsheet and actually making adjustments, you’re not making it work.
Having a farm business is not just about the raw technical skills of growing crops and raising livestock, there is an intense amount of business management skills needed as well. Budgeting is just one aspect. You could outsource this, and have someone else prepare your budgets but unless you actually follow those budgets down to the dollar, it will not work. Yes, they should be updated regularly but they need to exist in the first place. Without it, you’re just running on hope and coffee.
Thanks for reading! I’d love to promise that I’m back to regular blog posts but unfortunately, I cannot do that right now. Our lives are a bit of a whirlwind right now but I will try to have something for you each month so please subscribe to continue getting content.
Thanks for the timely article. We are gearing up for another project. 1000 taps plus a sugar house. They say once you stop spending on your business, your business is dead. We will most likley be building in two phases and try and avoid another loan as interest rates are just too much.