A budget is an estimate of revenue and expenses over a specified future period and is compiled and re-evaluated regularly. It is a vital tool for any business, including a farming operation, as it enables management to take full financial and economic control. A budget thus underpins the liquidity and solvency of the business.
A DIFFICULT YET NECESSARY EXERCISE
If you are like many farmers, you may find that budgeting is a challenging process, especially with decreasing profit margins, increasing input costs and South Africa’s currently constrained economy. But this cannot be an excuse for avoiding the exercise; indeed, it makes it even more imperative.
Alternatively, you may be hesitant to conduct a formal budget, preferring to make a rough-and-ready estimate on a slip of paper. Unrealistic expectations and worry can also make it a challenge to sit down and commit a proper budget to paper. Yet a budget can actually help you address these emotions, as it will paint a true picture of the business and be a guide to managing difficulties and creating solutions.
To achieve this, however, you need to include all aspects of the business (instalments, interest, private expenses and debt) in your budget. Without a comprehensive budget, it is virtually impossible to get a clear idea of the financial situation of your operation, and create wealth in the long term.
It is also important to involve your family in budgeting for the new production season in order to prevent overspending later.
Your farming budget should be followed by a cash-flow budget. This is an estimate of all cash receipts and expenditures expected to occur during a certain period. It will enable you to keep track of all expenses and income for the next production season, and help you plan accordingly.
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September 18, 2020