Essential Elements of a Ranch Budget (and your chart of accounts)
Starting a ranch budget from scratch can be a daunting task. We often envision a complex finished product. A ranch’s budget and the Chart of Accounts in QuickBooks (QB) are closely related. We start with a budget and our records in QB keeps track what we actually do. The chart of accounts will have a few extra components, but often we get way too many extras. To limit proliferation of useless accounts, and to make comparison between the two meaningful, I suggest keeping the budget and the chart of accounts closely tied. For this discussion, we are going to focus on P/L categories. We’ll talk about the balance sheet more in the future.
So, let’s start by keeping it simple: what are the critical elements?
If you have a livestock enterprise, you will have some direct costs (costs that increase as you increase the number of animals). These could include initial purchase costs, feed, vaccinations, tags, and freight. In QB, code these accounts as Cost of Goods Sold and they will magically appear in your P/L where QB calculates your gross profit. Quick side note: while “gross profit” and “gross margin” are often used interchangeably, that’s not quite right. Gross profit is a number, gross margin is a ratio. Dividing the gross profit number by the number of cows, for example, gives you the gross margin per cow.
Then, you’ll have some overheads (costs that do not change directly with the number of animals). In a ranch business, these should be clearly divided into 4 simple categories: Land, Labor, Equipment/Infrastructure, and General Administration. In QB, these are coded as Expenses. You can have sub accounts, and the exact nature of those accounts should be determined by the needs of your specific business. Let’s talk about some examples.
If you use credit, your tax preparer will want you to keep track of interest paid. An “interest paid” category would fit nicely under General Administration. If you use on-road fuel for off-road purposes, you might keep a separate “fuel” category under equipment/infrastructure, so that you can track excise taxes for rebate at the end of the year. You might use a combination of contract and wage labor. Often these are substitutes for each other, so make certain that switching between categories doesn’t accidentally cause one category to look good and another bad. “Repair and Maintenance” is another useful account under “Equipment/Infrastructure” because we all know that if we own stuff, we will need to fix it.
Notice, I didn’t mention any expense categories named “miscellaneous” or “other.” Or “other miscellaneous.” If you’re tempted to use these types of catchalls, just stop. QB often suggests one of my favorites called “Purchases.” What the heck do you put in there? They’re not helpful. Further, there are lots of things we often don’t need to track. Don’t spend time and mental energy doing things that don’t get you closer to where you want to be. For example, do we need to break “Repair and Maintenance” into subaccounts “Parts” and “Labor?” Probably not. Do we need to keep diesel fuel separate from gas? Maybe or maybe not. Let’s agree that simpler is better to start. Each situation is a little unique.
If you have multiple enterprises, I suggest making a budget for each enterprise separately. In QB, we designate classes to track expenses by enterprise. So, If I have a cow-calf enterprise and a sheep enterprise, I’ll keep two classes. If I also sell hay or sell some hunts, I’ll add another enterprise. Before I add another enterprise, I might grow it until it brings in $5-10,000 per year. Unlike expenses, I will often keep an “Other Income” category that will catch these smaller income sources.
I regularly get great advice from a friend who is a very experienced accountant. Walter Lynn has mentored me in a variety of different situations. The best advice I’ve gotten from him many times is to keep accounting simple. It’s easy to get too many accounts. Too many codes. After a while stuff gets lost in the shuffle. It’s too easy to forget what goes where. Then when we do year-end, we can’t be certain that expenses got into the right place. Is a category over-budget because we overspent on the intended items or because we categorized expenses incorrectly or inconsistently? If we don’t trust our categorizations, then we have to go through, item by item, which defeats the purpose of assigning things to categories.
We keep it simple, not because we’re stupid but because the simple things tend to get done.