A proper budget can enhance farm management

May 2021

Marius Greyling, Pula Imvula contributor. Send an email to mariusg@mcgacc.co.za

The events of the last years – the drought, pandemic, veld fires, recent flooding, poor support from the government, localised outbreaks of pests and diseases, and the current constrained economic environment of our country – have all emphasised the importance of proper management to survive as a farmer.

South African famers continuously face misfortunes and decreasing profits because of ever-increasing input costs. Without proper production plans and a proper annual budget, you will find it exceedingly difficult to manage your business successfully. This is applicable whether you are a subsistence, small-scale or commercial farmer.

ALL ABOUT BUDGET
In simple terms a budget is a formal written explanation of all your production plans and other plans for your business. It expresses all the income and expenditures related to your plans in physical quantities and financial terms. A budget is normally drawn up for a year, for instance from 1 March 2021 to 28 February 2022.

A budget consists of all your physical plans (production and others), with the final step the allocation of monetary values, or rands and cents, to every item – income and expenditures. This can be done by using the monetary values of previous years, called historical values, and adding a percentage to cover price increases. This way of budgeting is known as incremental budgeting. You can also calculate the values from scratch, known as zero-budgeting.

For example: According to your production plan, you plan to plant 300 ha of maize using 120 kg of LAN fertiliser as top dressing. Your service provider predicts that the prize of LAN will be R6 050/t for the coming year. The cost of the LAN fertiliser will then be 300 ha x 120 kg x R6 050/t = R217 800.

On the income side you plan to produce 5,5 tons of maize on average per hectare at an expected selling price of R2 750/t, according to your marketing agent. Your expected income will then be 300 ha x 5,5 t x R2 750 = R4 537 500.

You then follow this process for every source of income and all your expenses. Every production input – seed, herbicides, pesticides and every overhead cost such as fuel, repairs, maintenance and salaries – must be done in this way.

ADVANTAGE OF ZERO-BUDGETING
The advantage of zero-budgeting is that it is more accurate because every item is considered from zero. Whilst doing this, also ask the question: ‘Why is this necessary?’. Then you will have a powerful tool to manage your finances, especially expenditures which are under your control. You will suddenly notice past errors, inefficiencies and unproductive activities. 

Zero-budgeting is time-consuming and you will most probably need assistance to set up the system. Do not hesitate to get assistance or attend a training session, as it will only be to your benefit. 

Farm costs are overall divided into two groups:

• Variable costs, also known as production costs.
• Non-variable costs, which are overhead and fixed costs.

In practical terms, to determine the variable costs from scratch is not an unsurmountable effort. However, some of the non-variable costs can be difficult to determine from scratch and is not worth the effort. Incrementable budgeting or using historical costs for those items is a better option.

Gather as much information as possible to compile your budget; and you will have an ultimate tool to manage your business. A well-planned budget also makes it relatively easy to analyse the profitability of all enterprises or branches of your business. 

IMPLEMENT YOUR BUDGET
When you have put in the effort to compile a budget, the key to enhancing your management is to implement your plans according to your budget. Pay special attention to managing your costs. Attempt not to overspend and beware of impulsive expenditures.

If you encounter any misfortune, and have proper plans and the accompanying financial information in place, you will at least have something constructive to adjust to cope with the misfortune. Misfortunes could affect your income negatively and/or increase expenditures.

For instance, you may have budgeted to erect a new shed, but then you are struck by an unexpected pest which damages your crop. The result – a reduced income and extra costs to combat the pest. You realise that, according to your budget, you will not be able to erect the shed. You will then have to adapt your budget accordingly and possibly postpone the erecting of the shed to the next year. Now you are managing your budget.

Practice makes perfect; and you will be surprised how accurate your budget will become in a few years’ time when done properly and implemented effectively. A budget which is implemented properly will become an indispensable tool to enhance proper management, which is needed to face all the risks of a farming enterprise. 

Publication: May 2021

Section: Pula/Imvula