Commingling business and personal expenses can be messy
During a conference in the Raleigh-Durham area of North Carolina, young and beginning producers focused on family living budgets and investing outside of the business, among other topics. In general, those producers with the ability to sacrifice on the personal side are part of the more successful and profitable businesses. This type of discipline is also often directly correlated with the pace of growth within the business.
From my work in family business consulting, I estimate that on average, approximately 30 percent of living expenses are commingled with the family business. One of the exercises for the young group in North Carolina was to name some of the personal expenses that are commonly labeled as a business expense. As in life, some of the answers were quite creative.
First, most participants named the obvious culprits like insurance, fuel, repairs, and utilities. Of course, over the years numerous four-legged business assets have become a holiday dinner as well. Yet, from my observations there are still more.
Whether it was for business or pleasure, family and personal vacations are frequently combined with business trips. And other areas like pet care, office items, supplies, and technology are occasionally slipped into business expenses. While the specific expense varies, this commingling fills up the miscellaneous category for many family businesses.
Next, when personal and business expenses are mixed up together, serious misconceptions can occur, particularly when young people on and off the farm compare salaries and benefits. When valued in total, the commingling of expenses and fringe benefits often makes farm life not so bad.
Finally, commingling can obviously be a burdensome drain on a business. In some cases, mom and dad, or grandfather and grandmother do not want to retire completely in order to retain these extra benefits and little freebies. The result is a common problem: too many living out of the business. Unsustainable draws create cash flow issues and stress, both financially and emotionally.
Regardless whether the expense is a perk or a bag of seed, all expenses are part of the cost of production and must be accounted for. One suggestion I made to the young and beginning producers was pay to take paychecks personally out of the business and live within those means. This money is both a business expense and family income, but is not commingled.
Next time, we will examine investing outside of the farm business.