Your start-up budget

A start-up budget answers one question: will this pay? It's a plan for a year's income and costs. You build it in three steps.

Step 1: The gross margin

A gross margin is the income from one enterprise, less the costs that go up and down with it. An enterprise is one part of the farm business, such as a breeding herd or a mob of trade steers.

NSW DPI defines a gross margin as "the gross income from an enterprise less the variable costs incurred in achieving it". Variable costs are the ones that change with the number of animals. Think stock purchases, drench, feed, agistment, freight and selling costs.

Start from a NSW DPIRD budget that's close to what you'll run. Then change the numbers to your own prices and your own place. DPI says its budgets are a guide only.

Step 2: The overheads

Overheads are costs you pay whatever the size of the mob. Think vehicle costs, insurance, rates, phone and the accountant. Make the list as complete as you can. Missing overheads is a common reason a first budget looks better than real life.

Step 3: Interest

If you borrow to buy stock, add the interest. Interest is what the lender charges you for using their money.

Gross margin, less overheads, less interest, gives you the profit for the year. If you pay yourself from the farm, take out drawings too. Drawings are the money you take for living costs. Our household drawings calculator helps you work out a fair figure.

Be honest with the numbers

• Use a sale price a bit below what the agent expects. A budget that only works at record prices isn't a safe budget.
• Allow for some deaths.
• Test a bad year. Drop the sale price by 10% or 20% and see what's left.

If the budget only works when everything goes right, it's better to find that out now, before you buy stock.

Our guide to your first farm budget builds a full budget step by step. For trade cattle, try the cattle trading margin calculator. For sheep, there's the sheep gross margin calculator.