Do You Know Your “True” Cost of Farm Living?



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 If the reverse is occurring with funds being withdrawn, what level of lifestyle can your farm support?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.