Every day, farm owners and operators are faced with a series of choices—some major, some minor. From choosing which crops to plant to deciding on equipment acquisitions, fertilizer usage, whether to hire more labor, and more, the choices are endless and often require frequent revisiting as situations change. And every decision requires careful consideration of your farm’s enterprise budget.
What is enterprise budgeting for farms? Why is it important? How can a farm management software help you create and keep track of your farm’s enterprise budget?
What Is an Enterprise Budget?
It should be noted that an enterprise budget is distinct from a “whole-farm” budget. Where a “whole-farm” budget is concerned with the totality of the farming business, the enterprise budget is concerned with the particular financial features related to a specific product.
However, just like with a whole farm budget, an enterprise budget will still attempt to estimate costs and profits—just for a single enterprise instead of the whole farm.
For example, say Paul is a farm owner-operator who grows and sells not only potatoes and tomatoes but livestock as well. The totality of Paul’s inputs and expenses for the whole farm would be part of his “whole farm” budget, but if he wanted to set a budget just for his potato crop, that would be an enterprise budget.
Enterprise budgets are typically built on a per-unit basis—though the foundation of that basis may differ from one farm enterprise to the next. For example, some farmers might assess their budget by the acre for crops or by the head for livestock.
Why Enterprise Budgeting Is Important for Farm Management
So, why is setting a per-enterprise budget important for farm management? Why not just stick with a whole-farm budget? The biggest reason is that having a per-enterprise budget helps you get more granular detail on the health of your farming enterprise and its profitability.
With a simple “mile high” overview of the whole operation, it can be easy to overlook an enterprise that’s operating at a loss or isn’t producing as much profit as it should compared to your other products. It’s also too easy to miss a sudden shift in the return on investment for certain enterprise types as markets change and demands for commodity crops, livestock, and processed goods change over time in response to trends and global economic forces.
Additionally, building out a budget specific to each enterprise your farm has can help streamline and improve your process for constructing that whole farm budget. With more detailed information about your expenses and income from each enterprise, you could modify your plans to focus on products that will provide a better profit-to-cost ratio—helping you improve profitability for your farm.
Rolling Enterprise Budgets into a Whole Farm Budget
One way to use enterprise budgets is to create one for each distinct enterprise on the farm and then incorporate all of them along with financing, capital purchases, general and administrative costs, budget monitoring, and accounting actual performance. This helps to create a more detailed “whole farm” budget that can provide both the “mile high” overview of the farm’s performance for quick “at-a-glance” review while compiling all of the detailed data on each enterprise that a farm owner/operator needs to optimize their enterprise mix.
By starting with enterprise budgets and rolling that information into your whole farm budget, you can get the best of both worlds. A great farm accounting solution can help you compile your individual enterprise budgets and roll that data into a whole farm budget automatically to make tracking performance across both individual enterprises and the whole farming operation easy.
Farm Management Budgeting Details
Setting up a solid farm enterprise budget requires an understanding of your cost and profit centers. Some important considerations to make when setting up your budget include:
Determine Needed Resource Allocations
For the specific enterprise you’re creating a budget for, what are the resources needed to take that enterprise from start to completion? How much water will be used? What equipment will be needed? Are resources even readily available or will the enterprise require more resources than you currently have (are you going to need to apply for a business loan)?
To answer these questions, it’s important to review all of your units of input for the business enterprise in question, determine which (if any) inputs could be substituted for others, where those resources could provide the greatest return on investment, and whether it would be better to reallocate those resources to other enterprises. Reviewing basic establishment costs for new enterprises could also be useful for determining the resources needed for a new farming venture.
For example, say Jake is getting ready to launch a new crop enterprise to complement his existing potato farm. The first step in determining his budget for this farming enterprise would be to assess how much of the resources he currently dedicates to his potato farming efforts could be repurposed for the new crop.
Is he planning on planting on existing land or acquiring new farmland? Does his existing equipment work and have the capacity for planting and harvesting the new crop? If he already has resources he can reuse, then he might not need to allocate as much money to new acquisitions.
Additionally, if existing resources could be repurposed, would the new crop provide enough benefit to warrant a change in farming operations? For example, would the change result in an enterprise mix diversification that offsets risk or would the new crop provide greater profits for similar or lower expenses?
Determine the Cost of Labor
Labor is a variable cost that can significantly impact the profitability of any enterprise. When dealing with well-known and consistent production schedules, labor costs can be relatively simple to estimate—though unforeseen events can result in dramatic shifts.
For example, say that there’s a major public health crisis that strikes in the middle of the growing season or during harvest time and it causes a significant portion of your workforce to call out sick for weeks at a time. This would create a sudden labor shortage that requires emergency hires and overtime to cover—significantly increasing labor costs to cover overtime or increased salaries to attract skilled employees.
Having an estimate of expected labor costs is a critical step in preparing the necessary budget for a farming enterprise and avoiding cost overruns during the harvest season. With familiar products and processes, this is usually simple since you’ll already have a record of the average number of labor hours spent on tasks related to that crop—something that an enterprise resource planning (ERP) solution for farms can help you with by providing a record of previous years’ labor expenses and other labor-related reports.
For new enterprises, creating accurate estimates can be more difficult, as there may be some operational disruption caused by the introduction of new processes, the need to onboard experts in that enterprise (or train up existing employees), and unpredicted complications of raising a new product.
Determine Production Goals
How many units of product do you expect to produce and at what value? Setting a production goal and using that to extrapolate your expected profits before launching any new farming enterprise is crucial for estimating whether or not that enterprise will be worth your time.
For example, say Jake was examining that new crop enterprise and determined he could repurpose existing resources and labor capacity worth about $100,000 to produce 1,000 units of product. Depending on the value of the product, this could either be a worthwhile investment or a waste of his time. Just to break even, each unit would have to be worth at least $100—and every unit would have to be sold without error.
A more comfortable margin would be if the crop or livestock product was worth $200 per unit. At this point, even 50% of units sold would result in breaking even (assuming no additional expenses are accrued). However, he could produce 1,000 tons of potatoes with the same resources and garner a return of $524 per ton (based on April 2023 potato prices).
If the new enterprise can’t beat his profits for the potatoes he already grows at a similar or lower cost, then Jake may be better off continuing to grow potatoes unless he has a pressing reason to focus on a different product such as for crop rotation to preserve soil quality or a government incentive program related to a particular commercial good.
Variable and Fixed Costs
One of the challenges of creating a budget, whether for a particular enterprise or for the farming operation as a whole, is dealing with variable and fixed costs.
Fixed costs, which are costs that would be incurred regardless of actual production levels, are relatively easy to plan for in a budget since they remain largely stable. This can include things like your family’s living withdrawal, mortgage interest, or fixed depreciation of your assets. There’s a popular acronym for describing fixed costs called DIRTI 5 (Depreciation, Interest, Rent/Repairs, Taxes, and Insurance).
Because they tend to remain relatively stable, fixed costs are usually easy to account for in your enterprise budgeting plans. You aren’t dealing with constant fluctuations and needing to make adjustments if you decide to upscale any given enterprise’s output.
Variable costs are costs that can vary depending on the scale of your production. This includes items such as fertilizer, seed/livestock procurement, labor, and fuel costs (among many others). Put simply, if it’s a cost that can go up if you start producing more, then it could be considered a variable cost.
Variable costs are a bit more difficult to deal with in your enterprise budget planning, since they will scale up and down with production. Here, estimating how much you need to spend on each variable cost per acre of land or per production unit can be a useful way to establish your budget—though this can be hard to do if you’re launching a new enterprise.
This is one reason why, as the University of Nevada puts it, “Enterprise budgets are not precise.” Variable costs can have a significant impact on the profitability of any venture and, because they can change unexpectedly due to circumstances beyond your control, add at least some risk to any enterprise.
Evaluate Your Farm Budget with Farm Management Software
While evaluating your farm budget and setting a plan for your next quarter spending can be a tough task, there are ways to simplify things to make it easier on yourself. One tool that you can use to make evaluating your farm’s enterprise budgets easier is a farm management software with integrated accounting solutions.
With a farm management software, you can more easily collect reports on previous quarters’ spending and track trends in cost shifts—which can make it easier to anticipate changes in costs over time and adjust your enterprise budget accordingly.
Enterprise budgeting software can also help you organize your list of accounts payable and receivable to give you a better idea of your farm’s cash flow—helping you see if there are any periods of time where your obligations exceed your income so you can plan accordingly.
For example, say Jim has an upcoming harvest where he has a contract with a distributor to sell them 1,000 units of product at a price of $400/unit. That would be about $400,000 of gross profit. However, before he can get paid, he has to cover payroll costs totaling roughly $40,000—but he only has $20,000 in the bank because of other expenses.
In this situation, Jim’s choices are:
- Potentially miss paying workers until he gets paid—possibly causing labor disruptions and lawsuits over unpaid work.
- Take out a loan to cover payroll then use the profits from the contract to pay the loan off—which may incur extra costs in the form of loan interest.
- Get an advance from the distributor to cover payroll costs in the meantime—which carries the risk of refusal or the distributor renegotiating the price per unit down for the inconvenience.
However, with an accounting solution that tracks upcoming bills and accounts receivable, Jim could have anticipated his costs more accurately—potentially helping him avoid the situation entirely.
How? With information about an upcoming capital shortage, Jim could rework his production plans to focus on a less cash-intensive product, secure a business loan with more favorable terms earlier, bake prepayment into the sale contract with the distributor, or focus on his invoicing with other accounts receivable to increase cash flow. Doing any of these instead of scrambling to solve the problem at the last minute in the middle of harvest time would be less stressful and have a lower impact on profitability.
Improving your farm information level—particularly your information level about your finances—can be crucial for creating a realistic enterprise budget that keeps your operations in the black instead of operating in the red.