How to Prepare For Your Year-End Farm Financial Check-Up
Before we can start planning for another year of growing, we must first evaluate our business and production performance for the past 12 months. Completing a year-end financial check-up will help you analyze your successes and failures, in addition to revealing your opportunities for growth into the next season.
Five key steps to implementing a year-end financial check for your farm business:
1. Update Your Balance Sheet and Profit & Loss Statement
A balance sheet is a financial snapshot of your business at a specific point in time. Preparing an end of year balance sheet year-over-year provides you and your lender with a baseline, and allows for the preparation of accrual adjustments. Accrual financial statements deliver a more accurate picture of your operation’s actual income and expenses, and gives you the ability to recognize relevant expense or income trends. They also allow for the calculation of accurate cost of production, the ability to measure competitiveness, and can help improve planning.
Comparing year-end profit and loss statements can also help you measure your success throughout the year and better track your expense ratio. Are you meeting the benchmarks you set out for yourself throughout the year? Are you lowering your expenses per every dollar of earned income?
2. Schedule a Year-end Tax Planning Appointment with Your Accountant
Working together with an experienced agricultural accountant can help you identify proper year-end planning to help position your farm business, prior to filing your taxes. Are you ready to upgrade equipment? Should you prepay next year’s operating costs? Are you planning to purchase a new farm entity or transitioning part of the farm business to the next generation? It is never too early to begin gathering your financials to prepare for filing your farm business taxes or to set-up a meeting with your accountant to review your financial progress.
Mark Hartshorn of Hartshorn CPA, LLC in Hagerstown, Maryland suggests several steps you can take to make sure you’re adequately prepared for your meeting with you accountant. Before you head to your meeting, make sure you have your books already updated. Depending on how you keep your records, this could mean having bank accounts reconciled through August/September, or having written record of the year’s income and expenses, in addition to projections through year-end. When you meet with your accountant, you will also want to discuss who (what contractor/vendor) should receive a 1099, as they are due January 31, and who you should receive a W-9 from. If you haven’t started planning for retirement yet, ask your accountant what tax deductions you may be able to benefit from by starting a retirement fund.
3. Review Your Annual Budget & Examine Your Cash Reserves
Once you have completed your year-end financial projections, it is important to compare those figures to your annual budget. Did this year progress the way you anticipated? Did you find yourself with higher input costs or lower projected income than expected? Being financially aware of your budget will help you to make better business decisions, help you to prepare for the coming year, and allow to you to review your cash reserves on hand. It is always a good management decision to set aside three to six months’ worth of living expenses for an emergency fund.
4. Reach Out to Your Farm Advisor Team
Every farm has a unique resource team supporting their farm operation. Your team may include a financial advisor, farm insurance agent, crop insurance representative, and/or an attorney. Remember to check-in with them as needed - you do not want to overlook an opportunity!
Connect with your financial advisor to discuss your current or future investment options. If you find yourself with additional income, it might be the right time to start or adjust a retirement savings plan.
Remember to review your farm insurance coverage and make sure to update your policy coverage, if you have made any big changes to your operation. As you are finishing your harvest season, also remember to complete your crop insurance production reporting forms to ensure the most accurate yield information is available for the upcoming year. Be sure you check in with your agent prior to sales closing deadlines.
Revisit your existing will and make necessary updates. Did your family unit grow, your business restructure, or did you purchase additional assets? We recommend keeping your will updated and in a secure location to help your family be better prepared for the future.
Consulting with reliable advisors and completing the current year-end updates will certainly help to support your future success.
5. Schedule a Check-in with Your Lender
The fourth quarter of the year is a great time to check-in with your lender to discuss your successes and any challenges you faced during the year. Lenders look forward to discussing your future plans or any changes you may have made to your business plan or marketing plan. Loan Officer, Paige Hargett, adds, “Detailed record keeping is imperative for your lender to understand how the year went, even the bad is welcomed as we want to better position your operation for the upcoming year. Our main goal is for you and your operation to be successful.”
During your check-in with your lender, think about two specific areas of conversation: evaluating the best use of debt dollars and reviewing your revolving line of credit.
Evaluate Your Best Use of Debt Dollars.
Year-end is an excellent time to take advantage of discounts for seed and fertilizer, and it can be tempting to put these expenses on a credit card. Keep in mind, you may be able to avoid the higher interest rates associated with credit cards by reaching out to your lender about setting up a lower interest rate line of credit to cover your farm’s operating needs.
Take time to review your existing loans and be aware of what interest rates you are paying on each of them, focusing specifically on your intermediate (vehicle and equipment) and long-term (home/farm mortgage) debts. You may have the opportunity to lower your rates and/or decrease your loan terms, which will save you interest costs over the long haul. Does it make sense to prioritize paying down a high interest rate loan or double up on a credit card payment? Work with your loan officer to identify and evaluate each source of debt and determine the best debt dollar use strategy for your operation.
Review Your Revolving Line of Credit.
Doing an end-of-year review of your revolving line of credit is imperative. You should ask yourself whether or not there is an intermediate debt that should be termed out as you weren’t able to pay it off as expected throughout the year. Is there enough credit available for year-end prepaid purchases to take advantage of discounts?
Farmers often utilize a line of credit as a tool to help manage their annual operating costs. Lenders encourage you to use credit lines for appropriate short-term expenses. Prior to using your line of credit for a major farm improvement, piece of equipment, or something that qualifies for longer term financing, contact your loan officer to talk about financing options. We want to help you make sure you are using your line of credit in the most effective manner possible. Fully revolving the line of credit on an annual basis is a requirement of renewing your credit line, so monitoring its use and repayment is essential.
We hope this list gives you an idea of what you should be thinking about during your year-end farm financial check-up.