Investing in a farm is often an expensive undertaking and can be financially stressful. Land ownership in particular is costly. Historical rates of return to agricultural assets average 4 to 5% making it difficult to make principal and interest payments on land notes with farm income only. Hence, business planning is especially important in ranching operations even if the decision to produce goat meat is a lifestyle choice or hobby rather than strictly an economic one. An expensive hobby may create a serious financial drain on the producer's checking account.
The agricultural producer or farm manager is challenged when organizing and managing farm resources to maximize economic returns to owned or controlled resources. Resources include land (owned and rented) and associated improvements, capital (borrowed and owned), and labor (hired, farm operator, and additional family). The manager is responsible for combining available resources and knowledge to best achieve the desired goals and objectives of the farm business.
As a key component of a business plan, budgeting is a management tool that helps the beginning producer evaluate the feasibility of a proposed venture and helps established producers identify areas for improvement. Budgets identify financial resources needed for both farm investment and annual operating costs. With budgets, management can begin to answer such questions as:
- How may the available resources best be used?
- What enterprises (crops and/or livestock) can be produced and which will contribute most to returns to owned resources?
- How much of the controlled land should be devoted to each enterprise?
- What equipment and machinery will be needed to produce the potential enterprises?
- What production practices should be used to produce each of the enterprises?
- How much labor (both family and hired) will be needed on the farm?
- What are the capital requirements?
Budgets help ensure that investors make decisions based on realistic data, not just emotions. Knowledge of budgeting and the ability to use them will help make the right decision.