The Power of Budgeting in Agriculture
by Klayton Tjoelker, CPA
Agricultural operators can greatly benefit from budgeting, which can simplify decision-making and streamline operations. But what is a budget and exactly how does it add value? To begin, it is important to understand the two main types of budgets:
- Forecasts: A forecast is an estimation of income and expenses for a future time period, assuming that there are no major changes in the operations of the business. This is typically the first budget you would prepare, to set a baseline.
- Projections: A projection is an estimation of income and expenditures for a future time period, assuming one or more significant changes in the operations of the business.
In agriculture, a significant change could be an expansion of acreage or livestock, purchase of large equipment or robot, adding a new product, relocation, or something along those lines. Quite frequently, we would prepare a forecast to set the baseline prior to preparing a projection, but that does not necessarily have to be the case.
When is a good time to prepare a budget?
Really, anytime is a good time, but it does make a lot of sense to begin budget planning and prep near the beginning or end of the year. It is nice to have a clean starting point in the fresh year. For crop farmers, consideration could be given to preparing a budget based on the crop year, rather than a calendar year. For example, it may make sense to begin your budget time period immediately following harvest and have it end at the completion of the next harvest.
Is budgeting a lot of work?
It certainly doesn’t have to be! Through the use of software and other programs, we have more tools at our fingertips than ever before to simplify the budgeting process and speed things up. Our process uses historical data from your accounting software to estimate what future years will look like, so the time investment by the operator does not have to be really substantial. That said, investing some time in the details will pay of in having a true, accurate budget.
What are the benefits of a budget?
There are many benefits to preparing a budget. For starters, a budget can be helpful in strategic planning. Every operator makes hundreds of decisions each year and budgeting can be very helpful in the decision-making process. Included in that, budgets can help in making financial decisions – how much will be needed on lines-of-credit, should I finance or pay cash for equipment upgrades? Additionally, a budget can help you determine the anticipated payback on investments in property, plants, and equipment. Budgeting can help determine if the operation should be looking for expansion opportunities or looking to relocate.
Another benefit to budgeting is determining how to facilitate an ownership transfer – how can we use the funds from the operation to pay off the exiting operator without over-burdening the operation? Finally, budgeting can help operators with reaction time to changes in the market and prepare for increasing costs. Supply costs continue to increase, and budgeting can help determine how to best react to those increases. Labor costs also continue to escalate, especially as minimum wage increases and overtime rules for agriculture phase in over the course of the next few years.
How can we help?
Many agriculture operators are hesitant to invest the time and money into budgeting, but as financial advisors, we truly feel that the benefits far outweigh the costs. Budgeting can offer some peace of mind and help with the many decisions that go into operating day to day and year to year. We look forward to helping create that peace of mind for your operation!
Call us at (360) 734-4280 or fill out the form below and we'll contact you to discuss your specific situation.
Klayton Tjoelker, CPA
Tax Senior Manager
Klayton Tjoelker joined Larson Gross in 2010. Today, he’s a Manager with specific expertise in serving businesses and individuals in the agriculture industry. He also specializes in tax planning and budget and cash flow planning.