In this third post of her series, Tarrah Young of Green Being Farm in Neustadt, Ontario shares an overview of financial management; a crucial tenet to “digging into farming”. To glean more of Tarrah’s knowledge, consider checking out the recordings of the corresponding webinar series found here.
Many of us get into farming because we are excited about the production aspects of farming, not because we enjoy creating budgets and cashflow statements! But running a farm, and indeed any small business is risky and many do not succeed. The better you are at predicting your expenses and income, and the timing of each, the greater your chances of success will be.
One mistake many small business owners make is that they keep themselves out of their budgets and just pay themselves with whatever is left in the account at the end of the day. And because of this, small business owners can go years before they pay themselves! That is not a wise way to farm. The first thing you’ll need to do in order to pay yourself a sustainable wage is figure out that that wage needs to be. And here’s where your goal setting becomes important. Ask yourself: how much do I need to earn from the farm to reach my financial goals? Everyone is different. Some people may not need to earn very much; it might be a side-project. Others want the farm to be their family’s sole source of income. So the question of success is very personal.
When you know how much you need to earn, you can integrate that into your budgets, along with the information generated from your production, marketing, and labour plans. This can tell you how much money you stand to make (or lose) with each budget. I like creating budgets in Excel, or other similar programs, because I can really play around with the numbers. I use them as pricing tools: if I charge x amount for my product, I earn y, but if I play around with my price, or the quantity that I produce, etc, I can see instantly how that will affect my income.
Enterprise budgets are useful, but they don’t tell you the whole story. They don’t tell you when you spend or earn money. And although you may have made a profit at the end of the season, you need to make sure that on a monthly basis, you have the money you need to pay your bills. You can still be profitable on an annual basis but be in the red at any time in the season. Cash Flow projections are great tools for forecasting income shortfalls. By rearranging the numbers in your budgets you will see a monthly snapshot that will help you see where you might need to borrow money, or perhaps re-strategize your business plan, or perhaps set marketing targets to help you mitigate cashflow shortages.
Keeping records on an annual basis is critical to generating accurate budgets and cashflow statements, and are also critical when preparing your taxes. However, even as a prospective farmer, you can draw up some surprisingly good budgets simply by doing your research. Check out the FarmLINK resources to find actual budgets of many different enterprises to get yourself off to a good start.