At Stark & Marsh we use benchmarking as a tool to compare farm financial performance. The average southwest Saskatchewan incorporated farm we benchmark is 4,000 acres. Between inputs, machinery and land, costs can meet and exceed $300/acre. Costs of $300/acre multiplied by 4,000 acres equals an annual expense budget of $1.2 million dollars. This number doesn’t include capital reinvestment, income taxes, and may not include personal drawings or overhead. Given this substantial annual risk, producers should re-examine their annual budgeting process.
Post-harvest is the ideal time to begin next year’s farm budgeting cycle.
Some farms (and software) confuse cash and accrual accounting budgets. Both should be considered separately, along with the balance sheet/net worth statement for a complete financial picture.
A cash accounting budget would consider gross land and equipment loan payments but would not include equipment depreciation, since depreciation is a non-cash expense.
A budget based on accrual accounting would consider only the interest portion of loan payments, since the principal portion of your payment improves your balance sheet/net worth. An accrual budget does include machinery depreciation, as the budget matches economic depreciation with the period it occurs in.
Cash and accrual budgets are both useful, but for different purposes. A cash accounting budget helps you manage cash flow in your operation. An accrual accounting budget helps you see if your operation is making a profit.
At the end of each year, to improve your financial performance, compare final financial results to your cash and accrual budgets.
After buying Tim Hortons in 2014, Restaurant Brands International Inc. implemented zero-base budgeting for the restaurant chain. Most people think of budgeting as taking the previous year’s budget and building on it or adjusting it, for example increasing budgeted salary costs if an employee has been given a raise. Zero-base budgeting means taking time to justify every line item in your list of expenses every year, starting from a base of “zero.” This is a more time-consuming approach, but it’s also a cure for the “we’ve always done it this way” mentality which is sometimes found in agriculture.
Farm budget planning hasn’t kept pace with the value, size or complexity of today’s farms. With the increase in financial risk, farm managers should take time to re-examine their annual budgeting processes, or implement a budget process if there isn’t one in place already.
A budget in the form of forward looking projected financial statements provide a complete financial picture of the balance sheet/net worth, accrual net income, and cash flow. Farms wishing to re-examine their budgeting process should consult their chartered professional accountant or local CAFA advisor listing.
This article originally appeared in the January edition of Grainews.
Sign up now to get advice about tax deductions, growing your income and managing your finances delivered straight to your inbox.