The August 3rd Mid-South Ag Finance Conference had a discussion by Dr. David Kohl on family living costs and their importance in the overall farm financial picture. Dr. Kohl in quoting (see complete article below) Clark Garland with UT Extension said that family living withdrawal are like concrete; once set, they are difficult to change. Data from Nebraska puts the average farm family living expenses in 2011 at $80,000 compared to $20,000 in 1986 and $4,000 in 1967. It was also noted that 25% of family living expenses are generally commingled in the farm business.
Why is this important of producers? This is one area I have found in working with farmers on farm financial plans that is the least accurate of all the financial data we look at and make plans from. Underestimated family living costs in a farm financial plan have the potential to derail the plan and the operation. Producers have to be realistic on the amount of family living withdrawals that their farm operation can support. One of the starting points is to keep accurate records on family living expenses so you will know how much the family is spending and can work it into the whole farm plan and see if the plan will work. Adjustments to either family living costs or the farm plan may be necessary, but you won’t know that ahead of time if you don’t have accurate family living and farm data.
Dr. Clark Garland who I consider to be one of my many mentors with the University of Tennessee Agricultural Economics Department has always compared family living costs to concrete. He put together his thoughts on the subject in a short fact sheet and I am posting it below. If we at UT Extension can assist you in developing a whole farm plan on your operation please contact your local County Extension office or Area Specialist – Farm Management for assistance.
UT Extension AE04-57
CONCRETE THEORY OF
FAMILY LIVING
Clark D. Garland
Department of Agricultural Economics
June, 2004
Generally family living expense projections are the least reliable figure in business and family annual cash flow estimates. Estimating family living expenses is similar to concrete in the following ways:
- There is no concrete established family living expense estimates for families in general. Each family is unique and it is highly unreliable to assume a “reasonable” figure.
- Estimating family living expenses is like pouring concrete and estimating the amount of concrete needed for the job. If no good previous figures are available, a person can closely figure the concrete needed, double the amount and still run just a little bit short of concrete. The same logic applies to estimating family living expenses without good records.
- After sand and gravel is mixed in concrete it is difficult to separate. Likewise, it is difficult to separate business and family living expenses if funds keep moving back and forth between the accounts.
- What is the price difference for concrete in an urban vs. rural area of the state? It generally costs more in rural areas due to transportation costs and etc. The same relationship generally applies to family living expenses. Likewise, an urban gardener generally has more time to devote to a garden than a rural family.
- Finishing concrete requires hard work. Likewise, effort and records are needed to adequately estimate and manage family living expenses.
- Concrete sets up. There is also a strong tendency for family living expenses to become fixed. Family living expenses are more directly related to gross receipts instead of net income.
To improve or maintain overall financial performance, incorporate realistic family living expense estimates and plans into your budget and manage the family living expense portion of the budget.
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