The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
What's Your RLU?
Jul 01, 2011
A farm enterprise must be able to generate enough revenue and net income to support at least one farm family which I call a "living unit". A farm operation should calculate how much revenue the farm generates each year and divide that both by the number of full-time equivalent employees (FTE) and "living units".
To get the ratio of revenue to FTE is fairly easy. You take the total revenue for the farm and divide it by the FTE on the farm. If you have several part-time employees, you should add all of their hours together and divide by 2,080 to arrive at the FTE for them and then add it to your full-time employees.
Let's take an example: Assume the farm has revenue of $2.5 million, has 4 full-time employees including the farm owner and hires part-time help that totals 4,160 hours for the year. Take 4,160, divide by 2,080 and you get 2 FTE and add the 4 full-time employees equals 6 FTE. $2.5 million divided by 6 equals $416,667. It is more important to see what your trend in this number is each year and due to the large recent swings in prices, you may want to also calculate acres farmed by FTE to see what your production per FTE is.
To calculate revenue per living unit (RLU) is a little more complicated. You first need to determine the amount of net income needed to support one average farm family. You then determine what your average farm margin is before owner's salaries and benefits and then divide the net income needed to support the family by this percentage.
Let's take an example: Assume one average farm family requires $110,000 of wages , benefits and taxes to support the family. A review of the farm showed that the net contribution margin to the bottom line before overall owner's compensation and benefits was 15%. $110,000 divided by 15% equals $733,333. This means for this particular farm, it takes $733,333 to support each family unit employed on the farm.
What many farmers do not realize is how much revenue or acres is needed to support each additional farm living unit that they want to bring into the farm operation. In the current case of a $2.5 million family farm, it probably could support 3 family units fairly well, however, if they elect to bring into another family member, the farm can not comfortably support 4 with their current revenues. The farm would need to grow revenues from about $2.5 million to almost $3 million to support 4 family members.
It is important to know what this number is for your operation and what the trend has been, especially if you plan on bringing on more family members to help operate the farm.