Family living expense dilemma
One of my favorite activities is analyzing farm family living expense data from various farm record database systems across the country. FINBIN and state record databases such as those compiled by Kentucky, Nebraska, Kansas, and Illinois are all very good references. The Nebraska Farm Business, Inc. database illustrates some interesting points concerning this major component of cash flow on farm family businesses.
While the 2017 farm family living expenses were reported at just under $100,000, this is only part of the story. This database breaks down the family living expense data for farms and ranches with high, medium, and low levels of profitability, measured by net farm income.
As expected, the top third of farm managers measured by profitability reported the highest average family living cost of $114,194. There is an old saying that, “The more you make, the more you spend.” This data proves the adage true. The biggest surprise in analyzing the data was that the lowest third of profitable farms exhibited the second highest living expense at just over $100,000. One can only surmise that these individuals may have benefited from non-farm income to supplement their cash flow. The group in the middle of the profit scale had substantially lower family living costs at $67,000 per year on average.
What were the difference makers across the farm profitability sectors? Miscellaneous expenses, personal interest expense, gifts, and recreation were contributors to higher family living costs for the bottom third of profitable producers. Personal interest expense is often the cost of borrowing money on credit cards or other consumer debt. If left unchecked, the result can place the family into financial jail because of higher interest rates often associated with consumer debt.
It was surprising that the bottom third of profitable farms reported the largest amount contributed to non-farm savings and investments. This may be a result of non-farm income or possibly retirement investment options.
Farm and ranch families in the middle third withdrew over $13,000 from their savings in 2017. Withdrawing from savings to fund family living costs is definitely a symptom of bigger cash flow problems.
Another symptom of a cash flow problem is when family living costs are funded by the farm operation’s operating loans. This hampers the business’ ability to operate and may require that the credit facility be refinanced to term debt. As the agriculture industry enters the sixth year of squeezed margins, agricultural lenders are going to demand more transparency and accountability concerning family living expenses.