How to budget for a (financial) year? The case of a vegetable farm.
You just set ambitious targets for your company this coming year. But are you sure these are achievable? And how much funding do you need to achieve these targets? This is where a budget comes in handy.
A budget (also called a financial projection) helps you plot the path to achieving your objectives and assess the need for funding. Lenders will also use your financial projections to test your company's ability to repay the debt.
Let's explain how to build a budget with pumpkn.io for a farming business producing vegetables.
Step 1 - Define your budget period and the different cycles
- Start by defining a start and end date for your budget. Often this will be your financial year if you produce the budget for a lender. Otherwise, it may be the calendar year.
- Define the number of cycles within the year. For example, if you farm in Gauteng, you will often be able to farm 2 cycles (spring starting in August) and summer (starting around December or January). You may squeeze the third cycle just before winter but be sure to not overestimate your operations.
Step 2 - Divide your farm into plots or blocks with an assigned surface and name
- Each block is a unit of production - think of it like a hotel room that you want to maximise the occupancy thereof, or a machine that you want to utilise as long as possible.
- Ensure each block has a minimum viable production surface - this is often determined by your crop, buyer, etc. Too small and you won't produce enough to cover your fixed expenses. Too big and you may have a supply glut of produce.
Step 3 - Develop crop plans for each block per cycle
- Select the 'Crop Plan' tab under 'Plan & Budget'
- Add a crop plan and follow the instructions - selecting a start date (corresponding to the start of the cycle or shortly thereafter), a crop, production method, etc.
- Click on 'Review Plan' and review the budget. The budget is only an indicator of the revenues, expenses and expected operating profit. You can adjust some of the assumptions to fit your own experience and past results
- Once satisfied, click 'Validate Plan' and it will add the plan to your dashboard
- Repeat for each block and cycle, or simply duplicate the same plans for each cycle
Step 4 - Enter your fixed costs
- Select the 'Budget' tab under 'Plan & Budget'
- Add a fixed cost and follow the instructions - selecting a category, monthly value, etc. based on your current fixed costs or based on changes you'd like to introduce
- Make sure to account for a salary for yourself
- Click 'Validate Budget'
Step 5 - Review the full-year budget
Et voilà... your budget is ready once you've added plans and fixed costs and validated them. You can review your projected income statement and cash flow, and where necessary adjust some of the assumptions. If the budget falls short of your targets, the calculator will flag it for you.
If you develop a budget with separate tools, make sure to base all your assumptions based on recorded operational data such as your past sales, market data (e.g., the Johannesburg Fresh Produce gives access to past sales data for a small monthly fee), and input suppliers updated price lists for inputs. You may also want to stress test your budget. For example, assume a significant drop in sale prices or a drop in productivity and see how it affects your sales, revenues and profitability for the year.