American farms contributed about $132.8 billion to the U.S. GDP in the year 2017.
These statistics have likely changed over the last three years, considering the growing interest in agribusiness.
With the steady growth in the economy, the demand for food and related products will inevitably continue to be insatiable.
Are you considering buying or have been managing a farm? One of the essential aspects you must focus on is budgeting for you to break even and turn the tide towards profitability.
However, most investors do not understand the budgeting process for a company.
Here is everything you need to know about the budgeting process for a company.
Why Is Budgeting an Important Component in Farm Management?
You could be wondering what all the fuss about budgets is about.
Well, you’ll derive several benefits in your farm’s management process with a well-defined budget.
1. Budgets Help Keep Your Focus in Check
Budgets are essential in ensuring that you keep your eyes fixed on the price.
With a set-out budget, you’ll rarely have instances of random financial allocations. Your finances are accounted for to the last coin, which limits the risk of binge spending.
2. Budgets Help’s Limit Unnecessary Borrowing
The excitement of managing a new farm may get the better of you and lead you on a borrowing spree without realizing it. However, with a proper budgeting process, this rarely happens.
You’ll often spend what is within your budget by taking up one project at a time.
Budgeting cautions you against the probable risk of spending what you don’t have, which frequently leads to bankruptcy.
3. Budgeting Ensures That Your Firm Can Fund Its Current Commitments
One of the critical roles that budgeting plays is to ensure that you can meet all your current financial responsibilities.
Your farm has current and long-term expenses that are critical towards the routine running of activities.
You need a proper budgeting process to ensure that such obligations are met within specific financial periods.
4. Decision Making
The success of any business depends on the ability to make sound financial decisions. But often, such decision making faces derailment due to lack of reliable information to support the basis for specific actions.
With a budget, it’s possible to make a long-term decision that will affect the business.
These four benefits are imperative for any farm that’s keen on future success and financial stability.
Now that you’re aware of the benefits that accrue from proper budgeting, what are some of the types of budgets you may need to be mindful of in the management of your farm?
Types of Budgets
You may consider four useful types of budgets in the management of your farm. These budgets may help you deal with specific decisions that have a direct impact on the farm’s profitability.
1. Whole-Farm Budgets
For most farms, this is an essential type of budgeting towards ensuring an effective decision-making process.
This form of a budget is a summary of all the incomes, expenses, and profits.
Whole farm budgets put into consideration all the physical and financial aspects related to business operations.
With a whole farm budget, it becomes easy for you to analyze business processes. You are also able to make adjustments where necessary.
You may also utilize complete farm projects to compare your company’s profitability vis-à-vis, other competitors.
Whole farm budgets are expensive to undertake, considering the need for comprehensiveness.
2. Partial Budgets
You may also consider partial budgets in the course of assessing your business’ operations.
The partial budget only measures the returns and the expenses that may be a result of unprecedented adjustments to your farm’s initial plan.
Partial budgets can be useful in making short-term decisions within the farm.
3. Cash Flows
A budget is often a projection of the cash receipts and expenses for the farm spread over a considered period, usually 12 months.
It would be best if you had a cash flow in the management of the farm. This helps you determine whether the projected cash receipts will be enough to meet the anticipated expenses and disbursements.
Cash flow budgets are easy tools for establishing your business’ liquidity in the long-term.
4. Enterprise Budget
You can develop an enterprise budget on a per-acre or per-head basis.
This budget is useful in determining the profitability of various sub enterprises within your business.
Your farm can derive important base information about your operations. Such actions help you develop futuristic solutions to varying financial challenges.
Steps in the Budgeting Process
Here are the steps that will help avoid running into financial challenges.
a. Understand the Budget Assumptions
The budgeting process exists on the premise of assumptions. Your budgeting process must begin with an understanding of the sales, cost, and market-related trends.
Before commencing the budgeting process, you need to update your assumptions to keep them in tandem with the changing patterns.
b. Funding Is at the Center of the Budgeting Process
Once you’ve updated the assumptions, it’s time to consider the available financing options.
You need to consider your alternatives for the financing before deciding on all the viable projects you can undertake within the farm.
You may also need to identify all the incomes at your disposal within the projected period.
Funding stands out as an essential component of the budgeting process for a company.
c. Consider the Expenses
The budget development process seeks to ensure that your farm can meet all the financial obligations associated with your business.
The third step in the budgeting process should be the determination of all the expenses that accrue in the course of running your farm.
d. Separate Needs and Wants
Separating needs and wants ensures that your firm focuses on what is a priority to your business at all times.
Needs are budgetary allocations that your business can’t do without.
For instance, while you may want to buy new farm equipment right from the shop, you may realize that you have got the option of going for pre-owned farm equipment as an option, which serves the same purpose.
Budgets help you summarize your needs by focusing on the cost-benefit, then going for what you can’t function without.
e. Designing Is the Last Step in the Budgeting Process for a Company
Now that you understand your business’ financial needs, it’s time to throw in the last step.
Putting down the fine print will help you have a definite plan on how to budget your business and reach your farms’ goals.
Designing the fine print will also help all the employees within the farm to operate within a well-defined action plan.
Failing to Plan Is Planning to Fail
Now that you understand the benefits of budgeting and the types of budgets at your disposal, it’s time to focus on the budgeting process.
You need to consider your needs and differentiate them from your wants to make a well-informed decision.
The budgeting process for a company may require a keen focus on each of the steps stipulated in this guide to ensure a smooth financial planning process.
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