What Level of Spendable Income Do You Want or Need?

 
  From the June 19, 2017 Issue of Agri-News
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 When it comes to finances, most farmers’ fundamental concern is whether or not they can make a living farming.

“As farm financial specialists, we often speak about cost of production, return on assets, return on equity and maximizing our returns,” says Rick Dehod, agricultural farm finance specialist, Alberta Agriculture and Forestry. “As an agricultural lender, I often assessed loan requests on three premises. Firstly, does the farm create enough gross income to pay its operating costs as they come due? Secondly, does the farm make all of its debt payments on their due dates? Lastly, does the farm provide the farm family with a reasonable standard of living?”

Today, farm families enjoy the same standard of living as their urban counterparts. The most recent Statistics Canada data shows that the difference between household expenditures of an urban and rural household is relatively small, with the major difference being the cost of shelter. In 2015, total expenditures for an average Alberta household was $110,024, while total current consumption was $76,535.

“These household expenditures may seem high for the average farm family but often some expenditures, such as shelter, household operation and transportation, blur between farm expenses and personal expenses,” says Dehod. “In the end, there is only one pot of money that both expenses can come out of.”

In 2011, the average Alberta gross farm income was $264,518, and the farm operating expenses totaled $224,607 for a net farm income of $39,911. “Along with fertilizer and chemicals, family household expenditures are often one of the top three expenses that a farm has. In Alberta, a 2017 study saw that 79 per cent of household income was contributed to by an off-farm job. This shows a high reliance of farm families on off-farm income to provide a higher standard of living, manage volatility in farm income and provide funds for investment back into the farm.”

Although it is one of the top expenses a farm family has, Dehod says farm families often do not know what their total personal expenses are.

“Household demographics, the stage of the family’s life cycle, and family’s living expectations all contributed to different consumption demands. Keeping good records of your personal expenses is just as important as keeping good records for your farm business. We often talk about efficiency and scale, but needs and wants can affect the long-term viability and success of the farm. Knowing how your personal expenses fit into your farm’s strategic plan and your family’s goals and aspirations will help you in managing your finances and the ultimate success of your farm operation.”

2011 Census data indicates 98 per cent of Alberta farms are operated by farm families. “The ability of the farm to provide the farm family with a reasonable standard of living remains crucial to Alberta’s rural fabric,” says Dehod.

“It’s important to know what your income needs are, knowing what your personal needs are and how you will generate the income to fill those needs. This knowledge will also manage your wants. We often find that the wants get farm families into trouble. A family farm creates self-employment so managing the income to meet the needs of the farm and the needs of the family is hard to separate but always important to consider and a challenge to manage.”

For more information, see Off Farm Income in Alberta or Statistics Canada’s survey of household spending.

Contact:
Rick Dehod
780-427-4466

 
 
 
 
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For more information about the content of this document, contact Rick Dehod.
This document is maintained by Ken Blackley.
This information published to the web on June 1, 2017.