Part II of Financial Management on Black Sheep Farm
Have you ever asked yourself “how do other farmers budget and track their finances”? In this blog post, Brenda Hsueh of Black Sheep Farm in Grey County generously shares how she lays out her farm budget. From someone who’s worked successfully in the financial industry and in farming (see Brenda’s introduction post for more details) this is such a valuable window into how budgeting works!
Whether you’re dreaming about farming or have been running a farm for years, your first financial step each year should be making a budget. This is not set in stone as circumstances certainly change, but without knowing what income you can generate versus how much you can spend, spending can get out of control very quickly, or you might hold yourself back from spending too much and miss an opportunity. I like to start my budget with everything I can dream of, including the kitchen sink. Things will be taken out in the final evaluation, but planning for everything you could want can be a fun exercise, and more possible than you think!
A budget is really just lists of items that are either Income or an Expense. How much you choose to break up each section depends on the complexity of your operation and how detailed you like to see the breakdown of your operation. I personally like lots of detail, so I list out my income by enterprise (vegetables, poultry, lamb, greenhouse products, etc.) and have corresponding sections under expenses. That way, I can compare income versus expense for each enterprise to easily see if I’m under-earning/overspending in any one operation. This is not to say that each enterprise has to cover its own costs…you should just know for yourself if you’re running losses that are being covered by other enterprises.
You can set up a budget on paper, or in a spreadsheet. I like using spreadsheets because they’re essentially grids with math capabilities. You make a list of items in one column, put corresponding numbers in the other column, and then you can add, subtract, multiply, divide as needed. Each cell is an item of data you can manipulate later. You can certainly get extremely complex in your math, but really, budgets mostly require adding and subtracting. Spreadsheets are also not limited to Microsoft Excel. There is also free spreadsheet software out there, like in Libre Office. Whatever you use, the first thing you’ll do is set up the format of your budget by making lists.
In this section, you will list out all your sources of income. This would include farm income, off-farm income (for all relevant members of the household, such as a spouse or partner), grants, donations/gifts, tax benefits (though be careful with these as they can be hard to predict), rental income, etc. Make a different line for each source of income in the same column. Essentially, you’re answering the question, “What money will be coming in for the year, and from where?” You should also decide at this point what your fiscal year will be. The simplest choice is to choose the calendar year (January 1 to December 31), but for various reasons, you may choose a different period (like April 1 to March 31). You just need to remain consistent from year to year. In the next column, enter the dollar amount you expect from each income source. You can choose the whole column and set your cell format to ‘currency’ in whatever format you prefer (Cdn $, with 2 decimal points, rounded to the nearest dollar, etc.). The last line of this income list would be ‘Total’. This is where you would add up all the previous cells, either using the ‘=sum(xx:xx)’ formula, or just adding each cell ‘=b1+b2+b3…’
In this section, you should have a sub heading for each line of income you made above. Under each sub heading, you would list out every expense for that operation. For farm vegetable income, this could include seeds, compost, row cover, small tools, harvest packaging, etc. For poultry income, this could include feed, minerals, abattoir fees, egg cartons, etc. For off-farm income, this could include commuting mileage, estimated income tax for the year, union dues, yearly professional accreditation/registration, etc. For grants, this could include consulting fees if you’ve hired a consultant to apply for your grants, printing costs, mailing costs, etc. There should be a sub-total at the end of each of these sections.
There will also be many expenses that are really ‘whole farm’, as opposed to for one specific enterprise. I include these under the sub heading ‘Property’. These could include electricity, heating, internet, phone, building maintenance/repair. I also have another sub heading ‘Vehicles’ and list out the expenses per vehicle (truck gas, car gas, truck maintenance, car maintenance, truck insurance, car insurance, etc.) For the purposes of this budget, we won’t get into what percentage of these various farm/home/vehicle costs are allowed as ‘business expenses’ for tax purposes. This budget can help you do your taxes at the end of the year, but the specifics of where and how to report everything on tax forms should be discussed with a tax professional, or you need to be prepared to read through the Canada Revenue Agency tax guides for Farming Income, Business Income and Small Business Income, very carefully. These are actually a fascinating read for some, but generally, it’s torture for most people.
Depending on how much direct marketing you do, you may want to break out your marketing expenses under each income generator, or you can just have one marketing sub heading and include everything there. This area could include market fees, equipment, office expenses, etc.
You should also have a section for personal expenses, such as clothing, entertainment, household items (like toilet paper, cleaning supplies, new dishes, etc.), prescriptions, gifts, alcohol and food. If you have any hobbies that require purchasing supplies, add them in here too. Now you’ll finally know how much it actually costs to be addicted to knitting! Also, depending on how much you like to have a nest egg for a rainy day, you could also consider putting in a yearly savings amount. Planning to save is the only way to actually do it. Same goes for investing in an RRSP or other retirement savings option.
Essentially, how you organize your sections, depends on how you think about your whole enterprise. These lists, first and foremost, need to make sense to you. Sometimes coming up with your format will help you to organize how you actually think about your whole farm. How you list out each expense will also play in to how you label your expenses when you record them (part of the next blog post). If you set up consistent labelling, year end evaluations will be a breeze!
Now that all your items are entered and totalled, you should be comparing the Income grand total against your Expenses grand total (total of all the different section sub-totals). If Income is less than Expenses, then you need to make decisions about decreasing Expenses, increasing Income, or getting a loan. This is where other planning tools come into play, such as a business plan, cash flow, and loan calculations (principal, interest, loan term, monthly payment amount, etc.).
Once you’ve finalized your budget, you actually need to keep it in mind when spending during the year. If you’ve budgeted $1,500 for produce seeds, you should try and remain within that budget. If your expected income is less than planned, you should see which expenses you can cut out or decrease. Every dollar you come in under budget, is almost like a dollar earned! Throughout the year, you can update an additional column called ‘Actual Costs, Year-to-Date’. This way you can evaluate how on track you are and change your budget accordingly, but that’s the topic for a future blog post.