With the costs to farm today, hope is definitely not a strategy. The Consumer Price Index (CPI), which tracks inflation, is up 20 per cent since 2020. And according to data from Global Ag Risk Solutions, it’s two to three times more expensive to farm than 20 years ago.
Farmers of today can get into financial trouble faster than previous generations due to increased costs. On bigger operations, farm losses can’t be subsidized by off-farm work like they could in prior decades.
Bigger numbers add complexity and risk to the farm budgeting process. Since tracking farm financials can be an onerous process, I’ve broken it down into seven digestible steps.
1. The land budget
The land budget is used by your lenders, agronomists, accountants and for crop insurance reporting. Owned and rented land should be separated, and any crop share arrangements should be highlighted and segregated.
A typical issue with land rent is whether GST is paid, and timing and method of payment.
Legal land descriptions, field names, cultivated acres and even land appraisal values are all good information to include as part of your land budgeting process.
Canada’s largest farmland owner, Robert Andjelic, disclosed on a recent webinar that he uses spreadsheets to manage his land holdings. You can as well.
2. The gross margin budget
Gross margin consists of yield multiplied by price less your input expenses (e.g., seed, fertilizer, chemical, crop insurance). Some nuances of the gross margin budget include accrual adjustments for prepaid inputs, chemical pricing and rebates, accounting for bin run seed, and late decisions regarding private insurance and fungicides.
The gross margin budget helps you determine profitability of different cropping options. Using AgriStability-vetted production data is the best source of historical yield data.
3. The capex (capital expense) budget
The capex budget determines your capital addition and replacement needs, and methods of financing.
Paying cash for machinery and other assets when there is money in the bank will show up later as eroded working capital.
The capital budget needs to consider machinery trade differences, revolving machinery loans and capitalizing betterments versus expensing normal repairs.
Capital asset continuity/depreciation schedules should be obtained from your chartered professional accountant (CPA) and reviewed for accuracy at least annually.
4. The labour budget
The labour budget includes employees and custom/contract workers on your farm. Consider payroll deductions and taxable benefits for employees.
This budget determines who, how, and when your employees and contract workers will be compensated.
I still consider a benchmark of 2,500–3,000 acres per full-time equivalent on a western Canadian grain farm. In other words, a husband-and-wife team could farm 5,000 acres with some seasonal help.
5. The opex (operating expense) budget
This is the “everything else” budget. Examples include machinery repairs, small tools and professional fees.
Machinery repairs are typically hard to budget and are usually a trade-off between running new machinery and older machines. Significant one-time repairs can sometimes skew results year to year.
Another nuance is fuel. A good way to approach this is to find the actual quantity used in the previous year and apply the price for the new year.
6. The debt schedule
The debt schedule consists of both a loan schedule and a lease schedule. The starting point is recording the timing and amount of your loan and lease payments. The debt schedule can be beefed up by including interest rates and lease buyout amounts and timing. Tracking principal payments allows you to break out principal from interest on blended payments.
Operating leases could be tracked with your opex budgeting. Capital leases, however, should be part of your debt schedule.
7. Owner compensation budget
Both the cost to farm and cost of living has increased recently. Personal budgeting is needed to determine how much you need to withdraw from the farm in the upcoming farm budgeting cycle — especially when the farm is the only source of income.
Accountants usually advise a mix of wages, dividends and custom work to compensate farm owners.
Some banks will include owner draws as part of their debt servicing calculation.
Putting it all together
Now you have the pieces for a rolling cash-flow forecast and accrual income statement. Providing these numbers to your lender early and often will set you apart as a proactive farm manager and lower-risk borrower. Periodically updating and re-forecasting these numbers will give you better data to make decisions.
Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses. Find out more at springcfo.com
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