Farm finances within family definitely worth investment

Few farmers wake up in the morning excited about the prospects of discussing farm finances with the family. This is especially true when the discussions involve the next generation.

Farmers find these discussions difficult for many reasons: the topic encompasses a broad area and can include financial recordkeeping practices, purchase and sale decisions, capital investments, borrowing money and relationships with lenders, filing taxes and relationships with accountants and analyzing financial performances. The talks may not be as difficult when times are good but are much worse when financial challenges exist, usually manifested as cash flow deficiencies.

Financial management fluency is becoming more important as farms become more complex businesses, in which capital investment is high and profit margins are narrow.

In the illustration, the business and personal life cycles of farms will have moved in unison, starting when the senior generation began farming.

The senior generation will have grown up with the business, enjoying successes and dealing with challenges along the way that resulted sometimes from mistakes or poor decisions. It is concerning that, generally, farm family financial management skills haven’t kept pace with the business life cycle. The adage that businesses typically outgrow management applies.

It becomes even more concerning when the transition of ownership and management to the next generation begins. Past generational transfers typically involved the next generation buying the farm from parents, effectively re-capitalizing the business and resulting in situations where the business and personal life cycles started over again. This is happening less frequently.

Today, it is more common for the next generation to take over farm businesses from where they sit on the life cycle continuum as the senior generation exits. The incoming generation, with their personal life cycles reverting to the beginning, set out to advance the farm along its business life cycle, ultimately leaving it in a better place for the next transition, perhaps in 20 years or so.

The incoming generation are taking over much more complex and managerially demanding farms than what their parents had when they started. The new generation lacks the same opportunity to grow up with their businesses. As well, typically, their financial management skill sets are no more developed than their parents.

This means that heightening the importance of financial management is important, especially when intergenerational transition is factored into the discussion.

These factors can make farm finance discussions difficult:

Wealth — Farmers are millionaires, but what does that mean? Assets and equity don’t pay bills. A suggestion is to simply ask where money comes from. The only sustainable source is profit. So, while the balance sheet may indicate millions of dollars in assets and equity, a key focus in discussing farm finances should be on profit.

Financial management on the farm feels like it is a mess — Understandably, why would parents be eager to discuss farm finances with the incoming generation if they think their finances are in bad shape? Further, many will not feel that they can properly explain why things are the way they are. On one hand, situations like this can be difficult, but there are things that can, and should be done.

Successor disinterest in farm finances — This is a common issue. Children who express a desire to farm envision many things but one of them is not likely sitting behind a desk and dealing with farm finances. Farmers should counter this by creating an awareness that farm financial management is important. They should educate children about finances early on, long before specific discussions. Then, when it’s appropriate, extend the discussion to include the farm business.

Treat financial management as being a valuable management function — This is about walking the talk. If parents don’t place a high importance on farm finances, it’s unlikely that their children will.

I met with a farm family for a fourth time recently to talk specifically about financial management. They had decided to improve their financial management skills and committed to an investment of time and money to do so. At the meeting, one of the people commented that “it was making more sense all the time.”

My observation from working with farm families is that it is definitely worth the investment.

Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or terry.betker@backswath.com.

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