Keep family living expenses in check to support capital needs
It was 1976, and Randy Weber had just graduated from high school. He had grown up in a farming family and knew he wanted to start his own operation, so he went to the bank, took out a loan and started farming 400 rented acres. Today, Randy and his wife farm 12,000 acres that straddle the Illinois-Indiana border.
In expanding their farm over the past 38 years, the Webers have learned the importance of sound financial management and its ability to help you succeed or make you fail. Family living expenses are an important part of the working capital equation directly impacting a farm’s ability to survive tough years.
Most farm businesses are large enough now that reducing family living expenses won’t significantly improve the balance sheet, says Bob Milligan, a senior consultant with Dairy Strategies, LLC. So what’s the big deal? Lenders care very much about your living expenses because they can be a huge driver of working capital. Anyone hoping to take out an operating loan in 2016 should look at monthly draws because they directly impact cash flow.
“One of the things people like, including bankers, is that you pay your bills,” says Milligan, a former professor and associate chair of the department of applied economics and management at Cornell University. “That’s when family living and cash flow become issues in a downturn.”
Less Is More. Weber, now 58, focused with his family on conservative financial management while farming through the ‘80s.
“We thought, ‘What is the least amount we could pull from the business to live on?’” he says, “because at that time, the goal was survival.” Today, farm families are living on larger budgets than ever before. For example, in Illinois, the average annual noncapital living expenses for farm families increased nearly $10,000 from 2011 to 2014, according to data from a study by the Illinois Farm Business Farm Management Association.
Illinois farm families on average lived on nearly $82,000 in 2014, up from roughly $72,000 in 2011, according to the study.
Yet those sizeable budgets likely won’t last forever. Matt Bennett, a farmer and grain marketing analyst with Bennett Consulting, says producers should be prepared for the downturn. Being realistic about family living expenses might mean giving up some luxuries to improve the balance sheet.
“Maybe it’s time we think about selling the boat,” Bennett says.
Farm families should shift their thinking when it comes to family living in good times and bad. Milligan recommends producers start paying themselves for their labor. “What really well-organized businesses, from a financial standpoint, would do is pay themselves throughout the year as a labor expense,” says Milligan. “Then, if it is a successful year, consider taking out some money to buy a new house or put it in your 401(k), etc.”
Weber says he budgets a workable and realistic amount from which he’ll draw for the year. He then divides the total over 12 months, paying himself on a monthly basis. Good year or bad, Weber never takes more money out of the business.
“We never pull anything excess out,” he explains. “If it’s a good year, we just leave that profit to build working capital.”
That’s a lesson Weber has learned in nearly 40 years of farming. “You have to have saved resources to get through tough times,” he says. “You have to plan for times like this.”
Prioritize Business Planning. Next year could be the worst year young producers have seen in their careers, Bennett says. Survival will mean leaning on the wisdom of older farmers who made it through challenging eras such as the ‘80s.
“We’re going to have to be better business people than we’ve been,” he points out.
Weber, who fits in the older-and-wiser category, agrees young producers should focus on better business. He says most young farmers need to think about marketing strategy more than they do.
“You have some people who just don’t have a marketing plan because it’s been too easy to make money without doing anything,” he says. Financial management and business strategy are keys for growing a successful farm, Milligan says. “One of the real lessons of strategy is that unless you just don’t have the capital to survive, if your business is financially feasible, whether it’s a good year or a bad year shouldn’t impact you,” he says.
He encourages producers to take a close look at their business and analyze where they can increase their working capital. The best place might be family living expenses, but no matter what, Weber encourages young producers to not let the tough times drive them out of business.
“There’s never an easy time to start farming,” he says. “You have to hang on for the ride.”
Advice From A 38-Season Producer To Young Farmers Everywhere
Early career farmers who want to survive future tough times resembling the 1980s and early 2000s must take a second look at their business and focus on farming to the best of their ability, advises Randy Weber. The producer has farmed for 38 years along the Illinois-Indiana border, and he recommends emphasizing efficiency before seeking more land. “The question you always have to ask yourself is if you’re doing the very best job you can on the acres you have,” he says. “You need to forget about bushels to the acre and focus on net dollars.”