Budgeting, tracking expenses improves potential for ranch profitability
Worland – “If we can’t make a profit with a pencil, we can’t make a profit with a plow,” said Cole Ehmke, University of Wyoming (UW) Extension specialist. “We have to think about where our money goes.”
During 2018’s WESTI Ag Days, held on Feb. 14-15 in Worland, Ehmke emphasized knowing where money comes from and where it goes are essential in making the most efficient use of resources.
In general, Americans spend 33 percent of their income on housing, 15.8 percent on transportation and 12.6 percent on food. Other expenses make up the rest of the spending, with savings only accounting for 3.6 percent of the entire income.
“This does not hold true to the farm business,” Ehmke emphasized.
Further, he added some adjustments should be made to prepare for the future.
“A 3.6 percent savings is not enough – especially when we look at retirement,” he said. “Savings of 10 percent is what we should shoot for. We need to budget for paying ourselves to make sure our own future and retirement are taken care of.”
Social security should only be one prong of a three-pronged strategy for retirement, and savings is an integral part of that, he said.
As people in the ag industry look to plan for their future, budgeting is an important tool, Ehmke said.
“There are some issues with managing farm income,” he said. “In agriculture, we often get single-digit returns on our assets, but our assets constantly increase in value.”
“Managing farm income is different than managing income from a straight nine-to-five job,” Ehmke continued.
In the agriculture industry, income is irregular and uncertain, unless serious work is done developing a marketing plan, noted Ehmke.
On the positive side, however, housing expenses are often low or provided by the business, and food expenditures may also be provided, in part, by the business.
“Insurance and health costs may be higher, too,” Ehmke added. “Finally, there are no retirement plans on the ranch, which means we have to wait for capital gains and often don’t put money in savings. Retirement is a big issue for the ag industry.”
An important consideration for farmers and ranchers, said Ehmke, is taking advantage of tax benefits.
“If the farm or ranch pays for the household expenses, it is important to be aware of the Schedule F and its categories,” he commented. “Take advantage of the Schedule F.”
In taking advantage of tax benefits, Ehmke said it is important to separate farm and household expenses, utilizing separate accounts for business and personal expenses.
“It’s much easier to have a separate checkbook and do business expenses separately,” Ehmke explained. “Separate farm and household expenses give us the data we need to build a solid budget.”
He continued, “Expenses and spending from the past allows us to project forward.”
Tracking the dollar
An important aspect of expense tracking is understanding where every dollar goes from accounts.
“Sometimes we don’t even track our expenses,” Ehmke said. “If we pay with cash, there is no receipt or record made.”
A three dollar cup of coffee, Ehmke added, twice a week for 40 years adds up over time.
“Always refer to the voice of the accountant when we think about money,” Ehmke said.
When tracking expenses, Ehmke encouraged farmers and ranchers to monitor withdrawals closely and separate household expenses from business expenses.
“Know where every dollar goes,” he said. “This involves keeping receipts and also having a plan for where the money goes.”
Sticking to the budget
In addition to developing a plan and monitoring expenses, Ehmke said it is necessary to stick to the plan.
“Sticking to our plan is important,” he explained. “We can spend three months collecting data on where our money has gone and put that into a budget, but as soon as we get tired of doing it and go off the plan, the work is for nothing.”
“Our plan and our budget has to be a priority,” Ehmke said.
A number of options are available for tracking expenses, Ehmke said, including hand-written ledgers, spreadsheets or accounting software.
“Our grandparents looked at their available cash, thought about what their expenses were and then took envelopes, divided up the cash and used an accounts book to keep records,” he explained.
A hand-written ledger is the least expensive and easiest method of record keeping, but it is more time-consuming. However, because they are error-prone, hand-written ledgers can be challenging.
“Spreadsheets are also good, and they can be moderately low-cost,” he said. “Additionally, they are also good for helping us to run scenarios since it is easy to make changes.”
Finally, Ehmke noted software like Quicken, QuickBooks, Redwing and FINPACK are more expensive options, but the programs can make it easier to work with an accountant.
“When we talk about budgeting, we need to also look at our lean months, rather than the months that we make the most money,” Ehmke said. “We don’t want to spend based on our best months, like October when we sell calves, because that can put our business in a poor position.”
Saige Albert is managing editor of the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.