BUDGET AND PROSPER: Know where your money is going

September 2018

It is no secret that paperwork is the most daunting task for any farmer; however, it is a very important element in the farming puzzle.

Daily record keeping helps things run smoother and eventually saves the farmer time in the end. In terms of farm budgeting, it is supposed to determine a farmer’s every step. Budgeting is about estimating costs and revenue and net profit on the farm. It is about the principles of managing inputs and output in relation to production. Preparing estimates of finances in advance before putting plans into effect. 

Factors that may affect budgets are unforeseen circumstances like; outbreak of diseases, changes in market conditions and abnormal weather.

There are two objectives for farm budgeting; firstly, it serves as a basis for farm planning and evaluation and secondly it helps the farmer to adopt methods in which he can meet market demands, giving him higher return on investment. Budgets are valuable to a business as they can be a guide for economic gains. They are helpful in preparing statements; one is able to draw up alternative plans to improve an existing one. It is also very helpful in analysing the business. 

Advantages of budgeting
There are several advantages to budgeting:

• The farmer has a starting point for evaluation of his old plan, which makes it easier to adopt a new one.
• The farmer can be careful of outflows or any wastage that might occur on the farm. 
• The farmer has a point of comparison from his receipts, expenses and net earnings on the farm. 
• It informs the farmer of funding requirements or cash flow requirements.
• It is a guide to efficient economic use of resources available to the farmer, which will help meet project targets. 
• It helps to estimate production resources like labour, capital. 
• It is a good base for future improvement of the farm and periodic assessment thereof. 
• The farmer can predict profitability and check viability of his enterprise. 
• The farmer can detect problems easily and sort them out timeously. 

Three things are required in order to put together a budget; firstly, input and output estimates, secondly, fixed and semi fixed costs and thirdly, variable items of expenditure. These include monthly expenses, emergency expenses, any money for savings i.e. university funds, entertainment, own salary, vacation and other future expenses.

The total of all expenses, everything needed to earn in a year equals to the farm budget. People need budgets for different reasons: Starting a farm, New Year planning, minor changes in practice such as expansion of a unit or installing new machinery or drastic changes in the system. 

The question now is how one goes about putting together a farm budget. The best place to start would be with previous records if available and the best time would definitely be planning for a new season. Start by looking at what would be generally spent in a year; take time to make sure that this number is accurate. If there are no records, it is advised that an estimated budget is written down, but keep records for next year, so you can adjust accordingly. Different kinds of budgets are as follows: 

Cash flow budget
A cash flow budget is a summary of projected inflows and outflows over a certain period. The purpose is to estimate the amount and timing of future borrowing needs and demonstrates the farms ability to repay debts in a timely manner. A cash flow budget represents a projection of future deposits, and withdrawals to the business’ checking and savings account. 

Partial budgets
A partial budget is a planning and decision-making framework used to compare the costs and benefits of alternatives faced by a farm business. The focus is only on the changes in income and expenses that would result from implementing a specific alternative. A partial budget is used for the following reasons:

• Adopting new technology;
• Hiring custom work;
• Leasing instead of buying machinery;
• Modifying production practices; and
• Making capital improvements.

Whole farm budget
A whole farm budget is a summary of available resources and planned type and volume of farm production under the management of the farmer. It is constructed to include expected costs, revenue and profitability of each enterprise that makes up the overall farm business. The main purpose of this budget is to analyse a major change that has potential to affect several enterprises. A whole farm budget is typically used for taking over a new farm, adding more land to the existing farm or taking on a partner for the existing farm. 

Enterprise budget
Represents estimates of income, costs and profits associated with production of specific agricultural products. This budget is constructed on a per-unit of production basis (e.g., maize per hectare). Each enterprise on the farm requires a budget. An enterprise budget is used for the following reasons: 

• Allocation of income for an enterprise;
• Listing of inputs and production practices required by an enterprise;
• Helps evaluate efficiency of farm enterprises; 
• Estimate benefits and costs for major changes in production practices;
• Provides basis for total farm plan; and
• Supports application for credit. 

Farm budgets should to be adjusted every year, as expenses are likely to change. It could happen that the budget is bigger than gross income (total income before expenses). One should not despair when this happens, because a budget is your goal and it may take several years to reach. 

Meeting this farm budget might require doing things differently, like taking a different approach to farming; for instance, diversifying farming activities. Farming is about financial sustainability among other things, one needs to determine what it means to them to ensure that you stay in business for a long time. 

References

• Morgan, K.L., Callan, P.L., Mark, A., Niewolny, K., Nartea, T.J., Scott, K.H. and Hilleary, J., 2016. Farm Financial Risk Management Series. Part III, Introduction to Farm Planning Budgets for New and Beginning Farmers.
• Roth, S. and Hyde, J., 2002. Partial budgeting for agricultural businesses. University Park, PA: Penn State University.
  CAT UA366, 7.
• Jobes, R., 1994. Budgets: Their use in farm management. OSU extension facts (USA).

Article submitted by Ikageng Maluleke, Junior Economist, Grain SA. For more information, send an email to Ikageng@grainsa.co.za.

Publication: September 2018

Section: Pula/Imvula