In family businesses of all kinds, financial transparency is key to a healthy business and flourishing relationships. With the complexities of farm operations, financial transparency is absolutely essential. Unlike other businesses, farms are deeply personal: often hinged on the balance of financial decisions made by multiple generations. With many of these generations working together in day-to-day tasks, financial transparency can be the catalyst that maximizes the benefits of each generation’s perspective. Being open about finances isn’t just good practice, it’s essential for business survival and harmony in our family relationships.

So, why should we care about having these discussions with our family? While financial transparency may not mean opening up the farm books in their entirety, what matters is that each group of people has the information that they need to make educated decisions. Operating a farm requires management to make major decisions such as buying land, expanding herds, and purchasing equipment.

Some individuals may need the information to decide whether the farm can sustain the lifestyle that they desire, and if they need to supplement with off-farm income. Without a clear understanding of the financial position of the farm, it’s essentially impossible to make these costly decisions from a position of reality instead of guesswork. Financial transparency also cultivates an environment of trust among the family and diminishes suspicions about unfair compensation, hidden profits, or unequal workloads. These suspicions can grow when a lack of information is presented. It can also create opportunities to discuss shared expectations and reduce friction by eliminating assumptions.

Why do so many families struggle with financial discussions even in light of their importance?

Conflict Avoidance & Fear of Judgement

Some individuals view finances as private information and believe that discussing them with others invites potential conflict. However, the silence and avoidance ignore the future need that exists for clarity within the business or family, and this can create uncertainty and even greater tension over time.

Some family members may also fear being judged. For example, some family members may avoid discussions around specific areas of the financial statements, such as large amounts of debt, because they are concerned they will be criticized or fear others may lose confidence in their leadership.

Financial literacy

Another major barrier can be unequal financial literacy, either perceived or in reality. It’s common for different family members to have different strengths around finances and numeracy or different ways of understanding the financials. While one individual may have a deep understanding of accounting, loans, debt servicing, income planning, and taxes, others may not. Without taking the time to clarify terms, build knowledge and understanding, and define concepts practically so they can be integrated into business literacy, added transparency may seem overwhelming and futile.

What does financial transparency look like?

Having established the importance of these discussions and outlined some potential barriers, what does it actually mean to be financially transparent? Achieving the essentials of financial transparency does not require sharing every personal expense or removing clear boundaries in leadership.

Understanding financial structure and direction

Transparency involves exploring shared understanding of the financial structure and direction of the business in the areas that are important to each individual.

Clear accounting records

In order to accomplish this, we must first establish clear accounting records and systems that make the information readily available. These records can include financial statements, budgets, loan statements, and previous tax filings. While having these documents available is a great first step, it may not be enough to make sure everyone is on the same page.

Regular financial meetings

Whether monthly or quarterly, they can provide structured time to review these documents and establish clear expectations for the future. Creating a scheduled time for discussions also allows people to come with questions regarding information that is important for their role.

Role Clarity

If it’s not clear what roles people are in, this may be another important area of financial transparency to explore. Taking the time to honestly evaluate who does what, who is carrying financial risk, and how compensation is determined helps eliminate assumptions and feelings of inequity. In the spirit of establishing clear roles and responsibilities, it is also important to establish defined policies for major financial decisions.

When it comes to certain decisions, such as capital improvements, land deals, or equipment purchases, it is wise to take the time to agree on procedures that outline important stages of the decision. For example, who has the authority to make these decisions, how many people need to be involved, who decides that the financial investment is appropriate, and how the decisions get funded. Establishing procedures removes ambiguity and creates clear lines of communication among the team.

Transition/Succession plan

Finally, transparency also means clearly documented and communicated succession plans. Succession has the potential to be one of the most emotionally charged financial conversations within farm families. Transparency means having discussions around inheritance, buyouts, expectations for retiring or incoming generations, and how to successfully transition management roles over time. While these discussions may present unique challenges, not having these discussions can lead to significant relationship barriers and costly financial mishaps. Planning processes are ongoing, and it is unreasonable to expect that everyone has all the answers. Financial transparency and increased understanding is key to a healthy business and flourishing relationships.

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With costs constantly fluctuating, it can be hard to feel like you have control over anything. All you have to do is open your news app or turn on your TV to get overwhelmed by the current political and economic temperature. So, let’s focus on what you can control. With many farmers already dreading their next tax year-end, I hope to provide some tools to make your next visit with your accountant a valuable and efficient one.

The Driving Force

I have worked in multiple accounting offices in my career thus far, and each office uses the same primary driver to determine invoice amounts for clients. Time. Some of you may be thinking, “Well, my accountant doesn’t charge me for every phone call or meeting,” and while you might be right, the time still likely gets tracked on your file to determine how much your overall bill should be. So, consider this when interacting with your accountant – make sure you are getting value out of your conversations and meetings.

One of the largest, time-consuming factors that will likely be reflected on your bill is messy bookkeeping. This is one area that farmers typically have some control over. For some of you, bookkeeping is a thorn in your side, and the idea of spending more time learning how to improve your processes sounds like a nightmare. That’s okay – you might just pay your accountant more. But, for those of you who want to see your next accounting bill go down, it might require some effort on your end to understand what improvements need to be made. The best way to achieve this is by thoroughly reviewing and understanding the adjusting journal entries your accountant has made to your records. If you are unsure of why amounts were adjusted, it is likely that the same error will be made again next year, costing you a second time for the same mistake. It may not be realistic to eliminate all adjustments, as some are a result of complex calculations, such as your tax amounts. However, as a general rule, the fewer the adjusting entries, the lower your overall bill is likely to be.

Make The Most Out Of Your Meetings

When you deal with the same accountant for years on end, your annual meetings can become somewhat routine – lacking in the value they once had. While more time gets consumed “catching up” with your advisors, it can feel like significant time was spent sitting in a boardroom, but little to no insight was gained. So, here is what you can do to make sure you are paying for valuable time with your accountant:

• Take some time to reflect on the prior year’s operations in advance. This time of reflection can add a lot of great discussion to your meeting. For example, consider asking for a copy of your financial statements prior to the meeting so that you can go through it in detail ahead of time. Even though you may not understand every detail of your financial statements without first consulting with your accountant, it could highlight a few areas of your operations that may be worth discussing when you meet.
• Come prepared with questions. I have had meetings with individuals who come with pages of questions and it usually adds a lot of valuable insight to both parties. It helps guide the conversation as well as provides your accountant with a deeper understanding of what is important to you and your business. This understanding can ensure your accountant is considering your values and long-term goals throughout the year. As rules and regulations are constantly changing, if your accountant knows what your goals and concerns are, it’s easier for them to strategize on your behalf as new tax rules enter the arena.

Less Can Be More

Logically speaking, bringing all of your files into your accountant should make things a lot easier for them, right? Wrong. While this might be a point of convenience for you, you are likely paying for it. I have had clients bring in what feels like the entirety of every record in their office. Every invoice, every receipt, for the entire year. Yes, this means that if your accountant needs to see a bill of sale for a new combine you purchased in the year, they can just go get it from your mobile office. But, this also means you are spending money for your accountant to look through your records to try and find it. While this might not seem like a big deal, not every farm will have the same filing system as you. And, nobody knows your systems better than you, making you the most efficient at finding what is needed. The solution? Give your accountant only what they need. It may take some time to understand what it is that they need and why, but having a discussion with your accountant the next time you meet with them could help highlight what “typical” records are required for your accountant.

Hiring The Right Accountant

While this may not be a required step for some of you, I have had many conversations with farmers who are not satisfied with their current advisors. Some have spent many dissatisfied years with the same accountant because it requires effort to make a change. Some make the argument that there is a benefit to keeping the same accountant because they understand your farm history. While this may be true in some cases, if your current accountant is not meeting your needs, sometimes a fresh pair of professional eyes can make a significant impact on the profitability of your business. Finding the right advisor for your needs is absolutely critical. So, if you have been thinking about making a change, here is your permission to shop around for a new accountant.

Across the board, professional fees keep rising with inflation, and the demand on accountants continues to increase as less individuals enter the industry. A recipe for larger bills for everyone. By reducing your adjusting journal entries, coming prepared to your meetings, cutting out the excess information, and ensuring you are working with the right accountant, you might just have a fighting chance at keeping more money in your jeans while still gaining valuable insight from your advisors.

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Farmers face the daunting challenge of thriving amid market volatility, rising input costs, and unpredictable incomes. These factors highlight the importance of financial management on your farm. As I work with farm families to optimize their operations, I’ve come across many common pitfalls that may be harming your income-producing potential. 

Inadequate Cash Flow Management

Unlike other industries, cash flow management can be particularly difficult for farmers due to the fluctuations in the timing of expenses and income. It can be impractical to have consistency from year to year when high, upfront input costs can send your expenses through the roof. While it may not be feasible to have a consistent amount of cash in the bank, consider what you do have the ability to control. For example, having a sum of cash set aside for tough years could be a good way to protect your operations from the inability to pay important bills. It may seem like an obvious first step, but using your historical financial information to determine how much cash is required to run operations in an average year may be a good place to start when evaluating how to best manage cash. While improving record keeping may be the priority, focusing on analyzing the farm’s future cash requirements can safeguard you from a major pitfall: the over-reliance on credit. If you are not aware of the cash requirements for the operations, you may find yourself forced to use credit to cover cash flow gaps, which may be costing your bottom line with high interest. 

Not Managing Debt Effectively

While debt can be a tool to leverage income-producing assets, I’ve seen some farms accumulate too much debt. The obvious impact of overleveraging can be the risk of interest rates further damaging the farm’s cash flow position, inability to make the required payments, and ultimately, the damage to future lending opportunities in the case of default. If your farm is currently struggling with managing debt, consider prioritizing high-interest debt payments and make sure to spend adequate time refinancing when interest rates drop to ensure you are taking advantage of market savings where possible. It is important to have ongoing discussions with your accountant or financial advisor to make sure your debt management strategy is appropriate for your specific operations.

Lack of Diversification

Most farmers will have specific industry strengths that make it easy to invest the bulk of their time and money into one specific area of farming. This can significantly impact cash flow management, as most of your income may be reliant on a single revenue stream. It may be time to start thinking outside the box. I’ve seen cattle farmers open storefronts to sell their beef alongside other locally sourced meats, I’ve seen potato farmers branch out into the liquor industry, and grain farmers expand into apiculture. While some options may seem particularly cumbersome, consider how expanding into another revenue stream could complement your existing operations. However, be aware of the risk of overexpansion. Expanding too quickly without adequate financial resources or market analysis could cause more harm than good.

Risk Management

Risk management in all its forms, crop and livestock insurance, futures contracts, and government programs being the primary avenues, may be an area your farm can improve. It can seem like an impossible balance between managing risk and avoiding overspending on expensive premiums, but it may be wise to consider whether you notice a specific trend. Everyone has a risk tolerance level, and it may be useful to identify yours. Are you noticing consistent overspending on insurance out of fear of every worst-case scenario? Are you taking advantage of government programs that may be beneficial, such as AgriStability and AgriInvest? Are you staying up to date on available grants for specific investment opportunities that your farm may be undertaking? 

Misaligned Investment Priorities

This pitfall seems to be significantly more predominant in operations that are managed by more than one individual. Allocating funds to areas that may not be providing a solid return on investment could be causing the farm to struggle with cash availability. An example would be one “unaligned” individual investing in non-essential equipment upgrades when the cash could have been better used to improve soil health for an increase in yields in future years. Not saying equipment upgrades are non-essential, under certain circumstances, it can be critical to upgrade equipment. The importance lies in ensuring all decision makers are on the same page, requiring constant communication. If this is a pain point that your farm is experiencing, it may be worth it to implement some policies to safeguard against unnecessary spending. An example could be to require two signatures on every cheque over a certain dollar amount so that significant purchases are reviewed by another individual. 

Neglecting Technology Adoption

The farm technology world is developing at a very fast pace. This pitfall has two areas to watch out for: underinvesting and investing too quickly. I have met many farmers who are reluctant to invest in new technology, and, on the flipside, many who have allocated resources to several new pieces of technology regardless of their viability. Both sides have significant potential negative impacts on the farm’s profitability. While choosing not to invest in technology could drastically impact potential efficiencies, it could also play a role in the workforce your farm attracts. It is also important to consider the long-term plan of your farm: Are you contemplating handing the farm operations to the next generation at some point in the future? It may be wise to gradually invest in new technology to support the next generation, ensuring they won’t face the burden of making drastic, costly upgrades to modernize the operation once they take over.

Neglecting Succession and Estate Planning

It can be easy to put succession planning on the back burner year after year. Unfortunately, one can never truly know when it may become “too late” for estate planning. It is best to initiate these discussions early and frequently as you consider transitioning your farm. While it may be obvious to include farming kids in the discussion, also consider the importance of involving non-farming kids. Fair does not always mean equal, but the more conversation that takes place around these topics, the fewer surprises there will be for everyone involved. Not to mention that the earlier you discuss these topics with your team of advisors, such as your lawyer and accountant, the more tax planning opportunities may arise, keeping more money in the jeans of future farmers. 

The unique struggles that farmers face often breed resilience and strong work ethics. While some struggles may be good for your mental toughness, consider how cash management, diversification, risk management, and investments could reduce the unnecessary struggles faced by your farm. A few visits to your accountant may provide a tailored solution based on your farm’s financial health, easing the pressure of making significant decisions on your own. 

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