5 Steps for a Successful Year-End Farm Financial Check-Up

Before you start looking ahead at next year’s crop, you should first look back at the past year's business and production performance. Completing a year-end financial check-up might not be the most exciting task on your to-do list, but it’s not as difficult as it seems, and the pros far outweigh the cons.

Doing a financial check-up every 12 months allows you to avoid costly mistakes. By taking stock of what happened during the year, you can see what decisions were successful and which ones weren’t and may even spot opportunities to bring in more revenue.

Performing a financial check-up doesn’t have to be a headache. If you know what to look for and organize your documents, it can be as simple as following 5 straightforward steps:

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 annually is the best way to put the information to use so you can easily compare. It will also give your lender a baseline and make the preparation of accrual adjustments easier, meaning you’ll have a better picture of your operation’s income and expenses. That way, you can more accurately calculate the cost of production, gauge your competitiveness, and improve your planning.

Comparing year-end profit and loss statements allows you to measure your success throughout the year and track your expense ratio. Are you meeting the benchmarks you set for yourself? Are you lowering your expenses for every dollar of earned income? These are questions that can easily be answered with profit and loss statements.

2. Schedule a Year-end Tax Planning Appointment with Your Accountant

It’s never too early to gather your financial records in preparation for filing your business taxes or to set up a meeting with your accountant to review your progress. The earlier you can start, the less stress you’ll have later.

Are you ready to upgrade your equipment? Should you prepay next year’s operating costs? Are you planning to purchase a new farm entity or hand part of the business over to someone else? A certified public accountant can make recommendations based on your situation and prepare for tax season.

Before you meet with your accountant, make sure that you’re adequately prepared by checking that you have all the right documents and updating your books. Depending on how you keep your records, this could mean reconciling bank accounts through the current month or making a written record of the year’s income and expenses in addition to projections through year-end.

When you meet with your accountant, you’ll discuss whether you’ve paid any contractors or vendors who will need to be sent a 1099 forms, which are due January 31, and who should receive a W-9. If you haven’t started planning for retirement yet, you can also 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’ve completed your year-end financial projections, it’s important that you compare those figures to your annual budget. Did this year go the way you anticipated? Did you find yourself with higher input costs or lower projected income than you expected? Being aware of your budget and goals will allow you to make better business decisions in the future, prepare for the coming year, and protect yourself against emergencies.

To put yourself in the best position to handle adverse events, it’s commonly suggested that you put enough money aside to cover 3 to 6 months of expenses. If you’ve dipped into your cash reserves or haven’t reached this goal yet, you may want to look at your budget for next year to see how you can save up. While you may not want to think about unfortunate circumstances, you’ll thank yourself later if you have a backup plan and cash to spare.

4. Reach Out to Your Farm Advisor Team

Every farm is supported by a unique team of financial professionals. Your team may include a financial advisor, farm insurance agent, crop insurance representative, and/or an attorney. Remember to check in with them regularly. After all, it’s their job to help you set your business up for success! These professionals can often offer useful suggestions to make life easier for you…but you’ll never know if you don't ask.

Financial Advisor Check-in

Connect with your financial advisor to discuss your current or future investment options, especially if you find yourself with additional income. They’ll be able to suggest a few ways to put that money to good use.

Farm Insurance Agent Check-in

Remember to review your farm insurance coverage and make sure to update your policy coverage if you’ve made any big changes to your operation. When you finish harvesting, you should also complete your crop insurance production reporting forms. That way, you’ll have the most accurate yield information available. Your agent can assist with this, so contact them for assistance and to check closing deadlines.

Attorney and Will Check-in

Did you grow your family, restructure your business, or purchase additional assets? If so, you should read over and revise your will as needed. Regularly updating your will and keeping it in a secure location will ensure you and your loved ones are prepared for the future.

5. Schedule a Check-in with Your Lender

The fourth quarter of the year is a great time to discuss what successes and challenges you faced this year with your lender. Going over the good, the bad, and the ugly with your lender will allow them to help you make adjustments to your business or marketing plans and prepare you for the coming year.

During your check-in with your lender, focus on 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. It can be tempting to put these expenses on a credit card, but that comes with a steep interest rate. Instead, you may consider taking out a rolling line of credit (RLOC) to give you more flexibility with your spending.

You should also look at what loans you have and your current interest rates—especially your intermediate (ex. vehicle, equipment) and long-term (ex. home/farm mortgage) debts—to see if there are any opportunities to decrease the terms or interest rates, cutting costs long-term. This will also help you to decide what financial goals you should set for the upcoming year regarding your debts. Does it make sense to prioritize paying down a high-interest-rate loan or to double up on a credit card payment? Work with your loan officer to identify and evaluate each source of debt and determine the best strategy for you to attack and reduce them.

Review Your Revolving Line of Credit

Doing an end-of-year review of your revolving line of credit, if you have one, is imperative. Every year, you’ll be required to fully pay off any interest or debt you’ve accrued with your revolving line of credit in order to renew, so you must monitor your use and keep it in check. Is there enough credit available for year-end prepaid purchases to take advantage of discounts? Are there any debts you need to pay off?

Farmers often use RLOCs (Revolving Line of Credit) as a tool to manage their annual operating costs. Lenders encourage using credit lines only for appropriate short-term expenses. Before using your line of credit for a major farm improvement, piece of equipment, or anything that qualifies for longer-term financing, you should contact your loan officer and talk through your financing options to avoid pilling on unnecessary debt. We want to help you use your line of credit as effectively as possible!

The Bottom Line

When it comes time to do your farm’s year-end financial check-up, we hope this list will help you to sort through your to-do list so you can put yourself in the best position for next year. If you have any questions or need any assistance, feel free to reach out to us. We’d be happy to help!