At the end of the year, many farms reflect on the success or failure of their operation.
When I ask, “How are you? Many say they have a positive balance in their checkbook.
Since many farms run multiple businesses at the same time, it is difficult to see which business contributes the most to the overall farm income.
Some farms will have dairy and poultry businesses, others may have field crops and pigs, while others may have produce and poultry, etc.
When you think you have limited time and funding, it would be nice to know where we should be placing support for the companies that bring the most profit to the bottom line of the farm.
Business budgeting allows you to separate income and expense by business or area.
This will allow the farm to see how efficient the business is, how much effort is required, and how much the business contributes to the total farm income. It is also effective when considering an update of a company’s equipment or workforce.
Over time, a farm can see where inputs have been applied and whether or not it has been successful.
When comparing companies, it is often useful to calculate a company’s profit or loss on a unit basis. This way you can compare a pound of milk to a pound of chicken or hay produced.
To develop the budget, track the income and expenses of each business. With poultry, this may mean collecting income from eggs or birds shipped as income.
Costs can be all costs applicable to each business. Food, electricity and agricultural labor are examples of costs.
Shared assets such as tractors can be billed per hour of use or use a daily charge based on annual tractor and fuel costs. Many facilities have hour meters, or you can estimate based on business usage.
The costs can be divided between fixed and variable costs. Fixed costs are costs that are applied to the operation regardless of the volume of production. Taxes, buildings and equipment (depreciated), and insurance expenses are all fixed costs because you owe them whether or not you produce.
Variable costs are costs that fluctuate with the production of the business. This would include food and water, drugs, support labor, technical services, packaging or processing costs, rent, and interest on working capital.
It is important to know the variable costs per business because sometimes during the year a business will only cover its variable costs in the short term before sufficient income arrives. Hay production involves several cuttings to cover the costs of seeds and fertilizers and possibly all fixed costs.
In the long run, all costs should be accounted for and will appear as total costs in the company’s general ledger. The companies that have the best return on variable costs will help support the fixed costs of the entire farm.
Since many farmers sometimes feel overwhelmed with work, business budgets can give an indication of what is working for their farm and can help determine the right mix of businesses that will contribute to the overall farm budget.
These budgets can also come in handy when you plan to purchase equipment or hire farm labor. Sample corporate budgets are also published to help determine which aspects of production need to be tracked. These budgets can help you determine what funding might be needed during the year.
Knowing where you stand financially at all times helps in making good farming decisions.
Gregory Martin is a poultry educator from Penn State Extension. Its extension program focuses on issues related to emergency preparedness, poultry production and management, biosecurity, animal welfare and handling, disease management , mortality composting, nutrient management, township concerns about agriculture, and effective pest control that affects animal production systems.