Put Numbers to Your Goals: Multiyear Budgets
December 16, 2020
Multiyear budgets provide focus and remove surprises.
Most of the decisions you make for your farm extend beyond the current calendar year. Yet, most budgets are limited to 12 months. To position your farm for growth and avoid financing shortfalls, create a multiyear budget.
“Most business expansions get in financial trouble not because they aren’t profitable but because they are growing so fast,” says Allen Featherstone, an agribusiness professor at Kansas State University. “They outgrow their equity base, as most capital needs are multiyear.”
A multiyear budget incorporates long-term goals and trends. Similar to an annual budget, a multi-year budget factors in income and expenses to help make good decisions. But instead of having actual numbers, you use more estimates and historical data.
“Because so many factors can change, you take a high-level approach,” Featherstone says. “Build out the details based on assumptions of the current financial conditions.”
This type of budgeting helps you finetune your business focus, says Kala Jenkins, agriculture consultant with K•Coe Isom.
“You can always modify the multiyear budget down the road,” she says. “In having one, you have a better understanding of your farm’s cash flow needs and potential expenditures, along with the risks and opportunities you could face in the next few years.”
Don’t let the uncertainty of the future throw you off track. “For instance, if you are concerned about prices fluctuating, do low, medium, high forecasts for prices,” Jenkins says.
Set the Stage for Growth
If you are looking at expansion or diversifying your operation, a multiyear budget is critical, Featherstone says. “In additional to the initial investment of a hog or dairy facility, for example, you likely won’t be at capacity the day it is done. You need to plan how you will work up to the capacity needed to make it profitable.”
Include your lender and other partners in your budgeting process. They can help you fine tune your data and hold you accountable.
“When you’re talking to lenders, it’s good to have a longer-term plan,” Featherstone says. “Then they can anticipate your capital needs.”
The Basics of Multiyear Budgeting
Compared to annual budgets, multiyear budgets take more time investment. But they also provide a good path for the future, according Kansas State University’s Allen Featherstone and K•Coe Isom’s Kala Jenkins. Follow these guidelines.
Aim for a 3- to 5-year forecast period.
Use rough averages for your income and expense categories.
If you are looking at expanding or a new venture, use this process to analyze when and how much capital you’ll need until you reach financial stability.
Review your multi-year budget each quarter and update with new information.
Budgets are never perfect — but you need to complete one.