Gaining Traction and Vision for the Coming Year

Five Tips to Review Year-end Financials

Kelvin Ranck, Loan Officer

With the closing of the calendar year comes the opportunity to lookback at the past growing season and your farm business financials. The year-end brings a good opportunity to update your record books and plan for the New Year. Part of being a good manager is planning. Planning well requires us to analyze the past year and use the numbers and information to plan for the coming year. When we record, examine, and review the financial information from the year, we are better positioned to budget and make decisions going forward. This article highlights and explains five ways a farm operation can review, analyze and plan for their business.

1. Create or update the balance sheet

A balance sheet, also referred to as a statement of financial position, isa picture of your farm assets that shows your current financial position. The balance sheet details which of your assets are debts (loans) and which assets are equity (owned). Your farm equity is the portion of your farm assets that you own.

Farm Assets = Farm Debts + Farm Equity

The powerful thing about the balance sheet is it shows you what direction your farm is heading. Preparing the end of year balance sheet every year provides you the ability to see how fast your assets or net worth are growing. For example: how your inventories have increased or how your loan amount has decreased.

2. Demonstrated through inflation

How do you keep track of your farm’s income and expenses? As we reach year-end, reviewing and recording these items will give you a complete picture of your income and expenses to see which parts of your farm are most profitable and which are least profitable. Reviewing your income and expenses also helps you manage your cash flow. A farm’s revolving line of credit can help during the months when your seed and other operation expenses are greater than your income. Possibly the most exciting part of reviewing income and expenses is how it helps you measure success and your profitability. Have you met your goals for this year? For every dollar of expenses, how much income have you earned?

3. Create or update your budget

The farm budget is a powerful tool because through it you can set goals for your farm expenses and income. Budgeting means planning how much you will spend in various farm categories. The budget helps to guide your spending decisions throughout the year. Review the budget to see how well you have stayed on track this past year. It is helpful to make changes to your budget as prices increase and your farm changes or grows. Maybe you plan to milk more cows or farm more acres this coming year. The updated budget will help you decide how much cash to keep on hand to meet your growing farm needs.

4. Prepare for tax season by tax planning

Whether your farm is large or small, it is important to do some tax planning. Tax planning is evaluating your financial situation and working to ensure that you pay the lowest amount of taxes this coming spring. Businesses can plan ahead to make the timing of their income and the timing of their purchases work together to reduce tax expenditures. As you prepare for tax season, ask your tax accountant if there is anything you can do to prepare for tax season. Let your accountant know if you are planning to make any big farm improvements or equipment purchases.

5. Review farm line of credit use

Do you utilize a revolving line of credit? Farmers use a revolving line of credit to help manage their annual operating costs. Lenders encourage you to use credit lines for short-term expenses such as seed or fertilizer. Before you use your line of credit for a large piece of equipment or farm improvement, contact your loan officer to talk about alternative financing options. We want to help you use your revolving line of credit in the most effective manner. Fully paying down your line of credit each year is a requirement of renewing the credit line.

The five financial planning tools above are important for farm business success to gain traction and vision for the New Year. You may have additional tools and methods that you use to keep track of your business, like writing a farm narrative to record your farm’s history. The farm narrative can help you build vision for your farm’s future. As you lookback over your farm history or story, what changes would you like to make for the future? Share your plans or changes with your lender. Weare happy to be a part of your planning. Your loan officer can help you know which financing options are available and most helpful for your unique farm operation.

Kelvin Ranck, Loan Officer