The cost of living may be a lot more than you think

Cash flow is king in any business, and farmers need to factor 
in family living costs when preparing their business plans

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Now that the 2015 crop is off, it is important to review cash flow projections and marketing plans.

That process involves budgeting for family living expenses — a number that may shock you.

“In the last five years, family living costs have increased substantially due to inflation and good farm margins,” said Rick Dehod, a farm financial specialist with the province.

“The average Alberta farm family living costs in 2013 as reported by Statistics Canada were $71,429 before income taxes. Farm families today enjoy the same standard of living as their urban cousins.”

While cash flow projections are critical, especially in times of need, producers don’t have to wait for a crisis to benefit from good cash flow planning, said Dehod.

A properly developed cash flow projection can help a business foresee and prepare for potential shortages. Cash flow management can also help:

  • Maintain adequate cash reserves to pay all living costs; make bill payments on time; or invest in expanding the business should an opportunity arise
  • Reduce interest costs through managed borrowing
  • Increase interest income by transferring surplus funds into interest-bearing accounts temporarily, if appropriate
  • Control costs by having the cash available to take advantage of buying inputs at favourable prices
  • Improve relations with the bank manager and trade creditors
  • Plan for the next crop year

“As family living costs and the farm’s business costs are blended in, a farm business that prepares cash flow projections often learns something about their systems, the dynamics of their business, and the cash demands on their farm,” said Dehod.

They often have other positive outcomes as well.

“For example, you might discover that you need to pay more attention to markets to obtain the right price, or that you need to have a better understanding of your cost of production,” said Dehod. “You may decide you need to take a marketing course so that you can make better decisions to protect or improve your farm’s profit. Or, you may find that you really don’t know what your living costs are, and what effects these living costs have on your working capital position.”

To assist with cash flow planning, Alberta Agriculture has a cash flow analysis tool called Cash Flow Analyzer.

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