In recent articles, our discussion has focused on potential profit declines or negative margins due to inflated costs and the doubling of interest rates with possible price declines.

A general tightening of credit is now occurring across all sectors of the economy as a result of the banking issues in the U.S. and abroad and greater scrutiny by regulators towards individual credits and overall loan portfolios.

A lender that I have known for a number of years recently outlined his challenge with a young couple in their late thirties. Their family living costs, which are drawn out of operating loans, have been $160,000 each of the last two years.

This is in addition to taking a $40,000 withdrawal from the business, which puts total family living costs in excess of $200,000. The lender indicated that after discussions about the high amount of family living costs at the beginning of the year, the first three months of 2023 finds withdrawals on pace to exceed $250,000.

Tightening of credit with internal audit and external regulators may mean additional scrutiny of this credit relationship. He is very concerned that if a negative economic cycle were to occur, that this couple, who have been in business with two other family members, could quickly experience financial problems. This often results in a financial liquidity crunch for the farm or ranch business.

This couple's living expenses can be considered excessive or high maintenance. If and when financial adversity occurs, these high living costs can quickly escalate into family disputes if other partners and spouses feel that it is unjustified. This is just one example of why family living budgets are just as important as farm budgets.

Excessive family living costs are a part of the cost of production, which can impact breakeven and marketing and risk management strategies. This couple needs to develop a monthly family living budget and monitor it throughout the year. It is only a matter of time until financial economics catches up to them.

The first symptom of financial stress will be observed in the failure to pay down the operating line of credit. This could result in a refinancing request to convert short-term debt to long-term debt. Next, they could run up credit card debt.

Too many individuals living out of the business can be the recipe for financial issues. This couple needs to realize that their grandparents and parents are providing rental farmland at a discounted price, which allows them the luxury of a higher standard of living, but it also distorts their growth plans and sets them up in the crosshairs for potential economic and financial issues.

In the upcoming year, prudence handling family living expenses will be a high priority in managing a successful business and household.