In family businesses of all kinds, financial transparency is key to a healthy business and flourishing relationships — and 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.
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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 they need to make educated decisions. Operating a farm requires management to make major decisions such as buying land, expanding herds and purchasing equipment.
Why it matters: Everyone working within a farm business needs to be able to make informed decisions about their future within it.
Some individuals may need the information to decide whether the farm can sustain the lifestyle that they desire, and the 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 compensations, hidden profits or unequal workloads. These suspicions can grow when 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 discussion even in light of its importance?
Conflict avoidance and fear of judgement. Some individuals view finances as private information and believe that by discussing it with others it invites potential conflict. However, silence and avoidance ignore the future need 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 outlining 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, these can provide structured time to review these documents and establish clear expectations for the future. Creating a scheduled time for discussions also allows for 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, say, capital improvements, land deals or equipment purchases, it’s wise to take the time to agree on procedures that outline important stages of the decision. For example, who has 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 plans. 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. The key to a healthy business and flourishing relationships is financial transparency and increased understanding.
