What does it really cost to live on the farm?
On the farm, separating true business expenses from personal costs is critical to financial preparedness.
It’s hard to fix a problem when the problem itself is unknown. When it comes to finances, not knowing where your money is going makes planning difficult.
Living and working in the same place can make this even more challenging. On the farm, separating true business expenses from personal costs is critical to financial preparedness – whether in the transition process or day-to-day business management.
How much does it cost to live?
“The biggest factor is so many things are blended. Sometimes it skews our idea of the cost of living,” says Audree Morin, an FCC business advisor based in Guelph, Ont.
A dairy farmer herself, Morin lists a variety of expenses that commonly get confused between personal and business costs, including fuel, utilities, vehicle payments, and even seemingly straightforward expenses like rodent control. Putting the right expense in the right category can surprise farm families when they see just how costly it is to live on and maintain a farm property, or alternatively, how much it would cost to live away from the farm.
The consequence of not knowing these things is, for example, being unsure how much you need to retire. For an incoming generation, it becomes challenging to accurately determine how much income the farm needs to generate to support the family, and potentially multiple families, plus how much off-farm income may be required.
It’s also harder to know where cuts can be made in tough years, or if the right approach is being taken with regards to taxes. Blurring the line between personal and farm expenses can result in surprises at year-end. Even misunderstanding how to move cash within the business — say, by paying one parent via corporate dividends in a way that compromises the family’s ability to access certain childcare benefits — can add to the burden.
“If you have this conversation proactively you know exactly what you are in for and can stay on top of income tax,” Morin says.
How to separate expenses
Thinking critically is the first step to identifying how much it costs to live on and run the farm. Doing so means seriously considering which expenses are legitimately business-related, and which are not.
Monthly payments for a new truck, for example, can sometimes lean more towards personal lifestyle preferences than business necessity. Similarly, it might be possible to fold otherwise unrelated house renovations into farm business costs. In both cases lifestyle expenses will artificially drop, while business costs inflate.
“Gas is another expense usually buried in the farm. Some customers already keep a log of personal kilometres, or you can use an estimate for your personal vehicle to make a projection on your fuel cost,” Morin says. Regarding utilities, a percentage of existing electricity costs can be used to know the true impact on personal expenses, should the farm no longer cover the full amount.
Keeping track of expenses can be overwhelming, making it difficult to know where to begin. Morin says this is particularly true for those just beginning to proactively manage farm and personal finances, as well as those working through the succession process.
On her own farm, Morin began by using a budgeting spreadsheet acquired through their personal finance advisor to manage their personal expenses. She also encourages the use of accounting software that can help articulate expense categories.
“Having clarity on your numbers allows for more meaningful conversations with technical advisors,” she says. “It allows you to be more proactive. Any of these tools can help get you started. Always talk to your technical advisors.”
FCC Cost of Living Calculator
With her own experiences in mind — and with experience helping families transition generations — Morin and her colleagues Corey Henderson and Joel Bokenfohr began building a dual business and personal expense cost-of-living calculator for FCC customers.
“We were giving examples to families, but we could tell they wanted more guidance. I shared the tool I use at home and wanted to make it more succession-friendly for our customers,” Morin says.
“A separate tab lets you keep track of income from different sources. It can be used by the senior generation to know what they need, and also the junior generation for evaluating what is needed to support them as the farming family.” She adds data from the latest Statistics Canada agriculture census was employed to develop expense categories.
“You can enter data on an annual basis or monthly, whichever is easier. It helps with loans too, while giving you a good understanding of how much you need to live.”
Try FCC’s cost of living calculator for yourself. As with any accounting system, the calculator was built using common categories and statistical averages. Always be mindful of the unique characteristics of your individual business.
From an AgriSuccess article by Matt McIntosh.