Are family withdrawals counted in acquiring net farm income?
When determining the net farm income are family withdrawals subtracted from the gross revenue? If not, where do they come into play in determining a return on assets?
Tom Green County Texas
Net Farm Income (NFI) only includes farm business related income and expenses.
Return on Assets = (NFI + interest expense - value of unpaid labor/mgmt) / average total assets.
Technically the answer is no. Family withdrawals do not enter into any measures of profit. A withdrawal of cash by the owner of a business simply reduces the owner’s equity.
However, when calculating ROA, family withdrawals are often used as a proxy for the “value of unpaid labor/mgmt.” Family withdrawals are highly dependent things unrelated to the business of the farm (such as family size, unique family needs, preferences, and standards of living). While easy to calculate, family withdrawals can make for a poor approximation of the true value of the owner’s unpaid labor and management. Although more difficult to determine, a better proxy would be: how much would it cost to hire an outside person to replace the amount/quality of the owner operator’s unpaid labor/management?