Develop a budget to ensure you are valued.
1) Use last year’s records as a starting point for your five-line income statement.
If you’re starting a new operation, plenty of information is available!
Make sure you take regional cost differences into account (land rent is a
good example of this.)
2) Calculate your five-line income statement.
COGS = any expense that helps produce one more unit of output.
Production labor and associated payroll expenses, including workman's
compensation, unemployment taxes, FICA, Medicare, health insurance
Crop or livestock inputs – seed, fertilizer, soils, chemicals, feed
Overhead = any expense that you incur no matter how much production
you actually have.
The main ones are the "DIRTI" Five:
Depreciation, Interest, Repairs, Taxes, Insurance
Don't forget to include Managers' and Bookkeepers' wages/salaries,
marketing, and utilities.
3) Calculate the percent of sales for each line.
(Divide the dollars for each line by the total sales.)
Owner Draw Desired
(include income taxes):
Bank principal payments required:
GROSS MARGIN REQUIRED: (C+D)
SALES VOLUME REQUIRED:
(E/[E as % of sales—from historical])
TOTAL PROFIT REQUIRED: (A+B)
Dollars % of Sales
- Cost of Goods Sold:
= Gross Margin:
= Profit (Net Income)
4) Create your budget—from the bottom up. Start with your desired draw
(the amount you and your family need to take from the operation to
live on, plus income taxes). Add the principal portion of any loan
payments you need to make in 2011 to get the total profit needed from
5) Add your overhead expenses to the required profit to figure the gross
margin the operation will need to yield. Your overhead expenses
shouldn’t change much from the previous year, unless you’ve under-
gone a significant expansion or other major change.
6) Determine the breakeven sales needed in your operation to support the
overhead obligations and profit required. Do this by dividing the gross
margin (E) by the gross margin as a percent of sales (taken from your
records, calculated in step 3).
7) Step back and see if this budget makes sense. Is this sales volume
reasonable for this year, especially if it’s your first year in business? Is
it possible for the acreage you raise and the market prices of your
products? If it is, great! Develop a marketing plan (action plan) to
achieve that level of sales. If not, that's okay. Rework until you have a
plan that is sound. If this is a building year, how will you achieve your
goal (and finance the operation in the meantime)? Address these
questions early in the year to ensure you have a complete plan.