The first step to financial security is establishing a budget. Here’s how it works:
1. Start with the expected yield per acre and multiply it by the number of acres to be planted.
2. Multiply that number by the price you expect to receive (the total of your anticipated gross receipts).
3. From that number, subtract costs—both fixed and variable—to get net profit.
Net profit is the difference between your gross profit and total expenses. It is important to know your net profit so that you know how much “take-home” money you are generating from your business. Farmers who prepare a budget and follow it can help ensure that their net profit is positive.
In practice, growers often find their farming budgets don’t follow a straightforward formula because predicting costs for the year can be difficult. Fixed costs are the easiest to estimate. Fixed expenses, or overhead costs, are those expenses that do not typically change with the level of production. For example, the mortgage on a farm will stay the same whether or not a tobacco harvest is successful.
Variable expenses—especially labor costs—are much more difficult to nail down. These expenses are directly tied to the year’s scale of production.
To learn more about preharvest and harvest operations and costs, order your copy of the 2013-2014 Tobacco Farm Quarterly Production Guide.