# 5-step guide to preparing a budget for your dairy farm

Many farmers get third parties such as consultants to do their budgets for them.

What are the benefits to doing your own budget?

• If you came up with the budget, you will be more invested in sticking to it
• Itâ€™s your set of numbers, so why not do them yourselves?
• Gives you a greater understanding of your business and what youâ€™re trying to achieve

Below we outline how to do your own farm budget.Â

## 1. Start from the bottom up

When setting a budget for the new financial year, most farmers will use the previous yearâ€™s accounts as a reference point and start working up a budget based on the costs from the previous year.

However, the best way to approach a new budget is from the bottom up â€“ in other words, work out what profit your business needs to deliver to meet expectations and pay back debt.

Then you can work out where your cost of production needs to be in order to deliver these returns.

## 2. Understand and work out your profit requirements

Calculate what your financial requirements are for the next year. Include:

• Salary (make sure you pay yourself an adequate return and value your time properly).
• Rent (owner-occupier only). Even if you own the land you farm, have the discipline to include a rent, even if you choose not to take this money out of the business. Circumstances could change and you must be prepared for this. This should be charged at a commercial value (for example Â£120/acre).
• Return on capital (livestock, machinery, plant and equipment). Your return on capital should be a minimum of 10%. You need to make more money than the cost of borrowing and repayment. A figure of 10% also gives you a good buffer in case you have a bad year or your business is affected by the weather.

Add all these costs and then divide the number by your expected annual milk output to work out how much profit you require on a pence per litre basis.

For example, if rent is Â£120/acre and you have 305 acres, the total is Â£36,600. Divide 36,600 by your milk output (2m litres), so 36,000/2,000,000 = 0.018 x 100 = 1.83p/litre

Repeat this step for return on capital and salary.

## 3. Work through your historic profit accounts to work out your cost of production

Insert what your costs are likely to be for the year ahead. If your business has changed very little, it may be OK to look at last yearâ€™s accounts as a guidance.

However, if for example you have expanded significantly, some costs such as feed will have risen. It is important to ensure the costs you are adding in are accurate.

Once you have worked out your total costs you can divide this number by your total milk sales to work out how much milk costs you to produce in each area of cost on a pence per litre basis (like in step four).

• Can your business do without the single farm payment in your budget? This typically accounts for 1-2p/litre, but this is unlikely to remain, so ensure you can cope without it. Don’t include it within your budget.
• Always make sure you put aside a minimum of 2p/litre for depreciation so you are not caught out when you have to reinvest in something big and save it.

This will tell you how much your total income must be in order to cover your costs and meet profit requirements.

For instance, if your cost of production is 25p/litre and your profit requirements are an additional 9p/litre, then it is likely you will need to readdress your costs unless you are on a milk contract that can pay you a higher p/litre.

Is this achievable? If not, you need to reduce your costs.

## Top tips

• Look at your accounts over a three- to five-year period to understand whatâ€™s happening in your business. Itâ€™s dangerous to look at one year in isolation.
• Donâ€™t try to pay back debt too quickly because it can affect cashflow. Things that will last a long time such as housing, parlours and milking equipment should be spread over 10-15 years. Land should be written off over 25 years.
• A balance sheet is a statement of assets, liabilities and ownerâ€™s equity. Review your balance sheet once a year to see if you are making progress. But make sure you do it at the same time every year so the circumstances are the same.
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## 5. Use a proportional analysis to benchmark performance

Carrying out a proportional analysis review can help you to identify areas where costs are too high.

For example, if labour and power and machinery costs total 9p/litre, divide this by the output (30p/litre) and multiply by 100 to give you the target – for example, 09 % 0.30 = 0.3 x 100 = 30%

You can then see how you compare with targets and which areas of costs you need to work on. This can also be applied to beef and sheep businesses.

## Example of a proportional analysis

Actual Â£

%

p/litre

Target %

Output

30

100

Variable costs

30

Gross margin

70

Labour

3.4

34

Power and machinery

5.5

6

Property costs

Total fixed costs

40

Pre-rent and finance

30

Rent an finance

13