It's all fun and games until numbers get involved. So far we've dreamt up a gorgeous life for ourselves and we've figured out how much that gorgeous life is going to cost us. We have also thought up what our ideal farm looks like and why, and all those warm and fuzzies should be floating around inside all of us, waiting to motivate us to make it happen. Before we get going here, I want you to hold onto that feeling. This step is not about looking longingly at those goals as we progressively squash them to pieces under the weight of seed costs, limited markets, and employee wages. Instead this step is about fighting for our dream life and thinking creatively about our businesses until they mold themselves into and around our hopes for the future. Let's try to take that conventional doom and gloom feeling around the term "budgeting", and morph it into a tool like any other. It's not here to bite you, your budget is here to help you. I promise.
Like most things, your budget format is as unique as you and your business. Some people prefer to look at their numbers in an annual overview, or if cashflow is a concern, break it down into monthly chunks. You can sum up multiple income streams or expenses into headings ("produce income"), or you can separate them out if that works better for your brain ("CSA produce income", "Farmers market produce income"). The important thing is to make something that you will actually use!
My budgeting spreadsheet fits my personality and business perfectly, but only because I spent many years wishing for specific budgeting tools and finally recruited my accountant and spreadsheet-sorceress friend to build me a workbook that fit my needs. Our first step in working together was to determine my needs, or goals in my budgeting tools. I told her that I basically wanted to have a way to see if I was going to make enough money by the end of the year, and I wanted to be able to see if I was going to be close to overdrawing my bank account. Now I can change numbers around (what if we bought our potting soil in February vs April? Would we need to push more CSA members to sign up early in order to cover that cost?) and see the effects on our bank account. I have found that having this document is incredibly empowering. It allows me to plan for all the income that I need, and then shift expenses in order to make that happen. Again, you may not need something so complicated, but I strongly encourage you to create some sort of monthly budget in order to get an understanding of where your money is going and why.
Disclaimer: I'm not a financial expert nor do I claim to know anything about what you should do with your money. All I know is that once we took control over my own finances I felt a whole lot better. Here's how we did it.
In this step you will need
A 2019 profit and loss statement from QuickBooks, or your preferred accounting platform
A spreadsheet program like Excel or Google Sheets, or use this quick one from our farm
Your ideal budget and investments from Step 4
The goal of this step
To create a monthly budget for the upcoming year so that you can make a plan to meet your financial goals.
60 + minutes (more if you're doing this for the first time)
Export your P&L into an Excel or Google Sheet. This can take some Excel skills. You want to be able to list out your income and expenses, sum them at the bottom of each section, and get the balance, or net at the bottom. (If you are completely new to P&L's, or budgeting, grab a copy of Fearless Farm Finances, or The Organic Farmer's Business Handbook.)
Once you have your 2019 numbers, extrapolate them out so that they are evenly divided between the 12 months of 2020. I don't necessarily want to do an Excel lesson, since I trust most of you are or have someone who can whip up a spreadsheet. However, I did make a very basic template that you can use! It has some of our 2019 numbers, so just delete them and put your own numbers in. (If this is too quick of an overview, let me know and I can edit.)
This template has all of your month to month expenses, but it's missing the numbers that fall into your balance sheet. Add in lines for investments, loan repayments, grant income, and owners draw. (Tab 3 on my spreadsheet)
Once you have a basic template for looking at your numbers you can start to play with them. First tackle your expenses. I know that sounds weird, but bear with me. Earlier we decided how much money we needed to pay ourselves to be happy, operational human beings. Start with that number and put it in your budget under "owner's draw". Then add in your investment wish list. Next, change your employee wages based on what you want to pay your crew this year. Also make sure you're keeping track of the taxes and workers comp that go along with the salaries you're going to pay.
After entering your wish list items, go through your regular expenses and adjust them based on what you know is coming up. Did you have a huge repair in 2019 that is reflected in these numbers, but shouldn't happen in 2020? If you want to get fancier you can figure out when some of these expenses will actually hit (they probably aren't all nicely divided into 12 months), so that you can get an idea of how your money is going to flow.
Now the moment of truth. What's your net? If it's positive that's awesome! You get to move on. If not, you're like most of us and it's time to dive deeper. If your net is wildly negative first look at your expenses and make sure there isn't anything wonky going on. If it all looks good, ask yourself if you can feasibly earn that much more money. If you're just starting out and you're looking at a -$30,000 net, you probably can't invest in all the things you wanted to and it's time to pair that wish list down. If you're more established you may be able to make up that -$30,000 in increased sales next year. Don't believe me? I think you can. Last year we did this exact same process and realized we needed to make $27,000 more than we ever had before. That number motivated us, and steered our decisions. In 2019 we not only made that goal, we absolutely crushed it by making $50,000 more than the year before. Sure, maybe it was a fluke, or it was a particularly good season, but I will argue that our success was because this process motivated us to make that money. We had that precious little heart flutter of the promise of making enough money to get closer to our dream farm, and we sustained that flutter by using this budget to increase our sales to support our life. You can do it too.
Ok, I'll step off my heart flutter soap box for a minute and let you get back to it. Fiddle with your expenses and sales until it feels right, then write down that Net number that you need to make up this year. Next step is creating a marketing plan to help you reach that goal.
Questions? Comments? Let me know!
Taylor Mendell. I grow things for people to eat.