Like any business, running a farm
operation requires a viable cash stream. Along with funding day-to-day expenses
and debt payments, farm operations have to be prepared for unexpected
emergencies: a tractor breaks down; a
farm well collapses; and the roof on the cattle shelter leaks. Goals, dreams
and aspirations are also a big part of the overall farm plan. Dreams of owning
a different combine, purchasing additional farm land, or opting to fertilize
hay land all require cash flow. Among
the money requirements is also the need to support the family’s lifestyle.
The article, Can the Farm Afford your Cost of Living, published in AgriSuccess, posed
an important question. Unless you keep actual records, determining the answer
can be difficult. Whether you are the parents headed towards retirement and
have children who will take over the farm operation or whether you are the
child (children) taking over the family farm, knowing your lifestyle expenses
is important. Elaine Froese, a Farm Family Business Coach, strongly encourages
family discussions to be part of the transition process. Elaine's numerous articles appear regularly in the monthly Grainews publications. This one in particular, How Much Does Your Lifestyle Cost, may peak your interest.
Whether a financial plan is prepared
for a young couple who are working to support their farming operation or for a
couple who is choosing to transfer or sell the farm, the premise is to
determine which way the money is flowing (in or out of the farm operation). There are several questions requiring
answers. Who is supporting whom? If
money is being injected into the farm operation, how long will this continue until
the farm can financially stand on its own? If the reverse is occurring with funds
being withdrawn, what level of lifestyle can your farm support?
Knowing your lifestyle needs
today and your expectation of a lifestyle in the future can only be determined
by tracking personal expenses. Quite
often I have seen bank transactions, both personal and business, processed
through one account for sole proprietors. Since you are the sole proprietor of
your operation, there may not appear to be any need to keep the transactions
separate. However, the strategy is to
separate farm transactions from personal ones and manage the farm operation as a
business. Whether you pay a salary to
your personal account or lend money to your farm operation from off-farm
income, the benefit is tallying the cash flow. Separation provides
clarity. Even though receipts are
recorded for farm income and expenditures into accounting ledgers, a quick
glance at the farm bank statement instantly provides the current financial
status.
Seeing is understanding. Having the two separate accounts, farm and
personal, isn’t intended to complicate your life. Rather, the purpose is to account
for your lifestyle needs. Quantifying
the money required for sustaining your farm business or lifestyle will be
revealed in the financial statements. Even
if you borrow money from one account to fund the other, you will have a better
understanding of the funding needs of both your business and personal lifestyle
if separate accounts are kept. The process may place both your business and
family on a controlled budget. The advantage of doing so is that personal goals
may be more easily funded.
One personal goal is to save for retirement.
In order to know how much to save, you need to know how much you spend. Your retirement fund might evolve from the equity
in farmland. The sale proceeds or rental
income generated from the farm land may be one source of retirement income along
with non-farm investments. A financial plan
will solve the mystery of the unknown retirement income. Because the questions appear endless, the
Saskatchewan Ministry of Agriculture created this excellent workbook, Succession Planning-Estate Planning Checklist for Farm Families to walk you through
the process. The appendix section provides specifics worksheets: Collecting the Data; What Are Your Income Needs; and What Can the Farm Afford to Pay You.
Farming provides a rewarding
career opportunity and a unique way of life for many families. However, this way of life can sometimes present
stresses from many avenues. The confusion and uncertainty can dissipate with
advanced planning and advice from qualified professionals.
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