How to get your farm financially fit

Teagasc is running a series of five seminars starting in Carlow on 23 March, to help people in the process of getting financially fit. Topics to be covered will include: farm household planning and budgeting, dealing with income fluctuations, investment planning for education, agri taxation review and the financial toolkit.

So what does a financially fit farm family look like?

1. A financially fit family plans for farm investments or major life events and commits these plans to paper.

For major farm investments a written business plan is a must. Set out your goals and objectives using a planner, such as the Teagasc My Farm-My Plan booklet. This planning process also takes into consideration the household budget implications when the farm’s net cashflow is going to be impacted. For example, a child going to college or getting married, or a family member retiring from an off-farm job may require a forward household budget plan. A savings schedule will ensure there are funds available.

Committing plans to paper makes it easier to involve all members of the family. If sufficiently detailed, the document will have the added benefit of fulfilling any prospective lenders’ requirements.

A financially fit family understands that the farm business and the household can be looked at separately for daily cashflow management, but must be linked when it comes to forward planning.

When looking at income and expenditure keep the farm business and the farm household separate so that the sources of income and expenses and the net finishing position for both can be identified. This requires separate current accounts (and deposit accounts, if there are savings) for the farm business and the household.

2. Maintaining multiple accounts risks increased bank charges so investigate low-cost-banking options.

Deposit non-farm sources of income, such as wages from off-farm work or State payments, in the household/personal account.

Use this account to pay all household bills and personal expenses for family members. Many families use a credit card to pay all household bills, such as the weekly grocery shop or even major household purchases. The monthly credit card statement helps keep track of where the money was spent.

Use a separate farm account to manage all income and expenses from farming. A regular (usually monthly) bank standing order can be used to transfer money from the farm account to top up the household account. Financially fit families use online banking to monitor their accounts and often one member of the family is nominated to pay the bills using online bank transfers as required. When it comes to significant decisions, such as a major farm or household spending project which is going to be funded either by savings or debt, prepare an overall net cashflow projection for at least five years. This should set out the impact of the proposal on overall cashflow, taking into account both the farm business and the farm household’s requirements for cash.

As part of the process, be sure to estimate and include any projected increase in demands for cash from the household due to life events, such as college starters, weddings, etc. All family members can highlight the areas to be included here. By adopting this approach it is less likely that a conflict between spending on the farm or spending in the house will arise.

A financially fit family knows what its main income sources are, both now and in the future, and it always looks to safeguard these sources.

For some households, farming is the main source of income. In others, non-farm sources and State transfers (social welfare, pensions) also make a contribution. Financially tuned-in farm families fully understand what is necessary to draw down these valuable cash inflows. Some of the income sources are easy wins as they can be drawn down with minimal effort and are reasonably safe and secure.

Examples here include the various annual farm direct payments, such as the new Basic Payment, which should be preserved as a matter of priority. When these payments are drawn down, it is important for farm households to consider carefully how this money is spent and as far as possible to target the spending towards farm or household investment decisions which will give long-term benefits.

When looking to the future, always plan ahead to avail of potential future income streams, such as State pensions, by making sure that you are aware of/meet the rules around those schemes.

Equally, consider alternative sources of income, such as leasing out non-core land that is not contributing to farm profitability, or researching the pros and cons of forestry or other diversification options. Teagasc offers workshops on diversification opportunities through its annual options programme (www.teagasc.ie/ruraldev/options-programme/).

4. A financially fit family knows where to go to for information relating to business and personal finance.

Many farm families gather financial information from media and Teagasc technical newsletters. Public meetings and trade shows also offer valuable information on products or services which might improve the profitability of farm businesses.

Discussion group membership not only improves technical skills, but members also often share information on the best deals for farm inputs. Some discussion groups have set up purchasing groups to avail of bulk buying discounts. Financially fit farm families always shop around for goods and services, many use internet comparison websites. They are also careful to ensure they claim tax deductions for medical expenses or insurance.

5. A financially fit family has a good system to manage the farm and household paperwork.

The key point here is to have a fixed point where all paperwork is assembled and organised. This could be the corner of the living room, a spare room or a dedicated office. Establish a simple system, understood by all members of the family involved, to manage documents.

A simple system might have three elements: a stapler (to staple invoices, statements and receipts together), an in-out tray (or alternatively a box file) which acts as temporary storage until you get a chance to file the papers, and finally a filing cabinet complete with clearly labelled files allowing documents to be easily accessed when required.

Ensure that family members always put paperwork in the in-out tray at the end of each day – not leaving it lying around the kitchen, in pockets or in cars, where it will get mislaid. At least once a week a nominated person should go through all the paperwork and staple connected documents together, file what needs no further action and identify bills to be paid.

This system ensures that bills get paid, but, more importantly, it assists in monitoring the flow of cash through the business and the household. There are a variety of computer-based tools to assist in the monitoring process, including online banking websites.

COMMENT

Putting the why before the how

The Teagasc financial fitness initiative is a good exercise in bringing together the different stakeholders to focus the efforts to help farm families manage money.

Over the last number of years, Operation Cashflow has shown that giving direction and simple tools makes it easier for farm families not just to save on their farm, but also on their household bills.

Yes, it is critical to divide household and farm income to identify clearly where the money flows, but they must also be linked when it comes to establishing the family’s financial goals.

Most families would like to manage money better, but habits or bad practices continually work against them.

The biggest motivating factor is not the how but the why they are going to start. This comes from setting the short-, medium- and long-term goals that the family want to achieve financially.

Just like getting fit, the aim of this programme is to make people realise that once they set goals, the programme will help to achieve those goals.