Dave,
Recently, I began running my farm operation debt-free. I have 350 acres, and all the varying expenses often makes it difficult to budget correctly. I also have about $240,000 in debt from bad financial decisions in the past. Do you have any suggestions for budgeting in a volatile industry like mine?
Thomas
Thomas,
First, you want to set up a separate budget and run a profit and loss statement. You’ll want to estimate the income for the year as best you can, and you’ll need to estimate your expenses item by item and category by category for the year. After that, you’ll want to break it down by month. This is called laying out a business pro forma — a business budget.
Next, you’ve got two goals to work toward with your profits. By profits, I mean after you’ve paid household expenses. That includes a living wage, enough to operate, keep food on the table, the lights on and that sort of thing. After basic living expenses are out of the way, your net profit in the business should be divided between retained earnings — or savings — and debt reduction. The idea is that you’re going to put the lion’s share toward paying off debt for now. Still, you need to have something set aside for a rainy day. In your case, that could be taken literally.
Keep in mind that in business, retained earnings are used for more than just emergencies. They’re also for buying more land, equipment and anything else that’ll grow your operation. But you always want a pad in there. What if you have an unusual year, and your budget estimates are way off? It could be unexpected expenditures, or the fact you simply had a bad year. In business, that’s an emergency, and you’d take that out of retained earnings.
Doing a budget, whether it’s in business or personal finance, gets easier and more accurate with time and practice. You won’t get everything right the first couple of tries, but with a little time and experience your budgeting skills and estimates will become more accurate.