Budgeting 101
January 18, 2022

Budgeting, forecasting or putting together a projection for next year (whatever you want to call it) can be a very important part of any business, particularly a dairy farm. Preparing a budget can help an owner plan for the future of the operation.  Some of you might be planning for other family members to join the business; you might be planning an expansion to the barns, cows, crops or the feed center; or you might just want to know how much you will have left over at the end of the year.

Whatever you are planning for your operation, if it involves borrowing money to accomplish your goals, your lender will be very interested in seeing your budget, forecast or projection. Your lender might use any of these terms, or another term we haven’t thought of, to refer to a statement that depicts what you expect to have in income, expense and debt service for next year.

The income side of your budget will include things like your gross milk check, cull cow sales, calf sales, agriculture program payments, and any other income specific to the owners of the operation. What you expect to receive in your gross milk check will be based on the number of cows you plan to milk, the pounds of milk you anticipate from those cows, and the projected milk price for the next year for your area based on market conditions.  Similarly, cull cow and calf sale income will be based on your farm’s cull rate, projected value of cull cows, and your specific calf program and the number of calves you anticipate selling and the anticipated market value of those calves. The expected income from agriculture program payments and other items specific to you may be based on an average of the past couple of years for those items, unless you are aware of specific changes to those numbers for the next year, then you might want to make adjustments to those income items for known or expected changes.

For the expense side of your budget, it might be easiest, if you aren’t running an internal profit and loss program such as QuickBooks, to gather your expenses from your tax returns for the past couple of years to come up with an average for each line item, and then project each of those expenses based on what you anticipate happening next year. For example, you might be planning to add employees to the operation, or you might know that feed is expected to be higher next year, so you will want to make adjustments to those line items to reflect what you think is likely to happen next year.

After you have added all of your projected income items together and subtracted the total of your anticipated expenses for the year, the resulting balance is your net income, or what will be available to service your debt.  We referred to debt service above, and if you are not familiar with that term, it is the total of your annual payments due to any lender to cover payments for loans you are obligated to pay, including your mortgage, vehicle, equipment, and cow loans, as well as the interest on any operating loans. If you subtract your total debt service from your net income and the result is negative, that will be an indication that you will likely have to borrow money to get through the year; if the result is positive, then you are in a better position to plan for changes to the operation that may require borrowed funds to accomplish.

If you would like to speak to one of our loan officers about putting together a budget for your farm, please click the link here to locate the loan officer for your area. We would be more than willing to help you with any questions you have about the process. If you would like to work on putting your budget together and have access to Microsoft Excel, feel free to click on the link here to use our template.