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Separate farm business and family budgets

Be sure to monitor credit card balances, particularly during extreme economic cycles and in difficult periods.

David Kohl, Contributing Writer, Corn+Soybean Digest

April 9, 2024

2 Min Read
Family living expenses are one of the key areas where lenders will seek transparency.
Getty Images/John Kevin

Low commodity prices, inflated expenses, and resilient interest rates with no end in sight are causing lenders to zero in on cash flow projections and financial liquidity on the balance sheet.

Positive and negative outcomes on income statements will be a balancing act. The preservation of working capital that was built up during the recent pandemic will be under the watchful eye of agricultural lenders.

Family living expenses

Family living expenses are one of the key areas where lenders will seek clarity and transparency. Oftentimes, excess family living expenses are the culprit for loss carryforwards on lines of credit and can lead to refinancing requests of operating money. A Midwest banker recently emailed me inquiring about what amount to use for family living costs when analyzing credits.

First, keep in mind that the amount of every family living withdrawal is unique to the situation. Some lenders attempt to put guardrails on the family living costs using a formula.

For example, some lenders will use $20,000 to $25,000 for each adult living out of the business and $10,000 for each child or additional adult under care in the household. In this example, a household with a husband, wife, and two children would have family living costs of $50,000 to $55,000 annually. However, an analysis of farm record systems finds that current family living withdrawals range from $60,000 to $100,000.

Earned net worth analysis

Some lenders will conduct an earned net worth analysis to back into family living costs. They will use the beginning and ending balance sheets along with the income statement to develop the analysis. This analysis will often surprise the borrowers when they realize that their living costs were higher than expected.

Keep budgets separate

While the above formula analysis can provide structure, family living costs will deviate about one-third of the time. The following are some of the reasons for that deviation, which can be 30 to 50 percent of normal.

  • Unexpected expenses such as medical bills and travel to trigger events such as weddings, funerals, and family get-togethers can change the dynamics.

  • Off-farm employment can lead to increased child or adult care expenses and unreimbursed travel expenses.

  • A true assessment of the number of families living out of the business may find that the business is supporting grandparents, parents, children, and adult children who have moved back home.

  • Private school, university, college, and vocational or technical school expenses can add up quickly.

  • A family with a conservative lifestyle whose family living costs only meet basic needs and demands may have lower than expected family living costs.

  • The commingling of personal expenses like cell phones, insurance, and specific capital expenses like trucks, technology, trips, and vacations can result in higher family living expenses.

The key is to separate business and family budgets. Then, monitor credit card balances, particularly during extreme economic cycles and in difficult periods.

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

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