In early 2023 I sent out a link to a survey I was doing on farm drawings/owners wages, or whatever you call them at your place.
Well didn’t I get some amazing responses!, thank you. Whilst there were the expected horror stories, mainly around poorly managed succession, there were also some really uplifting ones of successful farm businesses and open communication.
It’s a huge topic and one I don’t think has been explored much. It’s rarely talked about in social or business circles, however it has generated a lot of interest online. I have decided to write a longer series of article with quotes and case studies and cover off on some of the issues raised. We will look at what farm businesses commonly pay for, and what they don’t. I will also call on some technical help on some of the business structure, centerlink and tax implications too, and this might take a little while.
For the time being, here is a little summary of the strategies that different farming families are taking toward this issue. It might get you thinking or provide a prompt for some important conversations.
Farm Business Approaches to Drawings/Owners Wages
1. High profit – High drawings – growing the farm business and saving or investing on or off farm
Not much to say about this one except #goals. The only issue is when long term wealth growth is compromised because living costs become out of step with profitability. Stay focused, stay flexible.
2. High profit – Modest drawings – growing the farm business and saving or investing on or off farm This is a solid wealth building strategy. Warren Buffet the American billionaire lives in the same house he first bought in 1958. Whatever the size of the economic unit (farm, individual, household), what goes out must be less than what comes in for growth to occur.
3. Low profit – High drawings
This is okay for a little while, perhaps because of life stage (teenage and young adult children) or a due to a difficult season, but in the medium to long term, if what is going out is higher than what is coming in you can hit the wall or compromise business growth very quickly.
If the profitability challenges are due to are long term systemic changes in the business or industry, the farming family may face difficult choices; either adjusting to a lower level of drawings or addressing the root cause of low profitability.
4. Low profit – Modest drawings
Living in alignment with your values builds happiness. However, if a low profit strategy is adopted for the whole of the business life, succession opportunities for the next generation and security in difficult years will be compromised. Many older farmers adopt this strategy close to retirement when wealth building is less of a priority and their income needs are lower and that’s fine. Just be aware that it’s often a source of inter-family friction when one household/generation takes this approach and another is focused on a different strategy.
5. High or low profit – living on off-farm income – everything spare gets reinvested into the farm
A really common approach, especially for those new into farming, those incredibly focused on business growth or those impacted by difficult seasonal conditions. It’s not just women working off farm, lots of men work off farm in wage or contracting capacities. Don’t get me wrong, it’s 2023 and most families have dual incomes, this is not the issue and I don’t think one or more people working off farm is an indicator of low profitability.
In this specific scenario the farm is not paying a profit share or a wage to the people working in the farm business, or is paying far under market worth.
I tend to get a lot of questions from people operating in this type of scenario.
It’s great when
– Profitable farm businesses can invest internally and further grow profitability
– Profitable farm businesses can reduce debt to manageable levels quickly
– You know your return on investment (ROI) and what you are getting from growing your business is as good as you could make elsewhere, when factoring in risk
– It helps normally profitable farm businesses can get through a difficult year or two
– Farming and family goals are clear and everyone is on the same page
It’s problematic when
– Succession issues are not sorted
– Off farm incomes are essentially propping up unprofitable farming businesses that could and should be profitable
– Off farm incomes reduce or stop for whatever reason, but commonly when babies come along
– Family or individual goals always seem to get pushed aside in favour of farm goals
– When it’s not a dream shared by both partners (remember feelings and attitudes can change as time goes on and that is perfectly normal)
– Traditional type blokes feel like they are being “kept” by their wives and they don’t feel comfortable with that scenario, regardless of the fact that most families are dual income. Some women have told me about their negative feelings, ranging from being uncomfortable to insecure because they are financially reliant on their husbands or partners and often volatile farm income.
– When one partner is putting pressure on another to work more off farm, essentially to support the farm business
– Low profitability is not just a stage the business is going through, it’s become the accepted normal
– Everyone is working all the time and its hard and it’s just not fun anymore
If your in the problematic zone it’s tough. It’s also easy to blame seasons or other family members.
Good communication, goal setting, professional advice and good decision making can really work wonders if you’re in the problematic zone.
Have a read of this inspirational story from NSW Farmer of the year 2018 Julie Andreazza. They had some tough years but it looks like they were choosing to live in the good sphere of this strategy.
Whatever strategy you follow, it’s really important to revisit it, at least annually, and make sure everyone is still happy with the arrangements and are aware of the long term and short-term implications of decisions.
Discussing family and farm goals, potentially at the same time can be helpful. You can achieve some great things, sometimes its about being on the same page about timing.
For those with young kids, modelling out the family expense pattern in advance of the teen/young adult years is a frightening but necessary activity. It can be a useful prompt to then look back at the business and see how profitability can be built to support this part of the family life cycle. In an ideal world you would be able to progress through this stage without going backward financially. In the real world, raising children is expensive and your most important investment and one that cannot be put off until after a good year.
Business growth and profitability are important, living in your values is important. They don’t have to contradict, but sometimes, if we are not careful, they do. If the pursuit of business profitability and business growth comes at the expense of living a life full of the good stuff, it won’t end well. So on that note, I will leave you with this musical quote and some inspiration from Neil Diamond.
But it don’t sing and dance and it don’t walk
And long as I can have you here with me
I’d much rather be, forever in blue jeans
Just remember, Neil’s singing about the love of his life, not his farm, his machinery or his stock.
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