Take the stress out of major late-year purchases

By Matt Reese

It does not take long to do the big picture math — good yields and strong prices made 2021 a solid financial year for many Ohio farms. Plentiful land sales and farm auctions offer options for farmers to spend their money in 2021, but the more detailed math regarding those major purchase decisions can get quite a bit trickier. 

Melanie Strait-Bok, regional vice president of ag lending for Farm Credit Mid-America, strongly encourages thoughtful consideration with ag lenders before making hasty year-end decisions impacting a farm operation for many years to come.

“I know this is not everyone’s favorite thing, but it is incredibly impactful to operations when we can compare balance sheets to tax returns and understand what is really happening,” Strait-Bok said. “The first thing we want to see from a farmer at year-end is updated inventory levels. We need to really dig into that balance sheet and say, ‘OK what changed from this time last year that we need to account for and make updates to the balance sheet.’ Most people are not going to spend New Year’s Eve sitting at their desks, but I would say within the last week of December or at least in the first day or two of January you should take the time to sit down and update balance sheet items, especially those that impact your working capital. These things could include inventory of any grain on hand, silage, livestock, pre-payments you’ve made, any wheat acres you may have out. Those numbers can change dramatically. Sit down and jot those down at the end of the calendar year, then get that appointment with your lender set on the calendar.”

With a lender, it is then important to review all of the details and goals of the operation to get a clear financial picture.

“As you think about the year-end appointment you have with your lender, it is a really important time to sit down and say, ‘Here is what happened in the last 12 months.’ It may just take an hour or 2. It is also good to share what you are planning on doing in the next 12 months. What might come up in the next year or two? What purchases do you want to make? You and your lender need to be on the same page about where your operation is going and what needs you have. Get an accurate balance sheet so we can understand and see those changes from one year to the next and be able to compare that to your tax return. We all know we do not want to pay any more taxes than we absolutely have to. Sometimes that tax return does not give us an accurate picture of what happened in the last 12 months. Having that conversation to understand what took place, how that impacted the balance sheet, then comparing it to the tax return, that is how we get a really good picture of where you are at from a financial standpoint. Then we can look at what you are wanting to do in the next 12 months and how it is going to impact your financial position.”

This hard look at the farm’s financial position is especially important prior to major year-end purchase decisions. 

“If you have any inkling that a property might be coming up, go ahead and give your financial officer a call and get a pre-approval out there so you have that peace of mind and remove the stress from trying to negotiate a price,” she said. “What would be the maximum price you’d be willing to bid? If you buy that property, will that impact you from buying the family farm you know is coming up for sale in the next 2 years? We need to make sure you understand the full implications now to your financial position for the future. This gives you the ability to sit down and say, ‘Here’s the number that I know fits my cash flow. This is what will happen to my working capital, this is what my solvency is looking like and this is the maximum number I am willing to go on this property without having implications in years to come.’ That takes some of the emotion out of it when you are actually bidding at a live auction. Getting that emotion out of the way and being able to know the number will really help your operation from a financial standpoint. By knowing these numbers, stress is removed from the situation if you are contacted about a private sale before the end of the year.”

Late year equipment purchases also benefit with this type of financial understanding.

“Do you really need this piece of equipment or are you buying it just to avoid taxes? If the answer is that you don’t need it, meet with your accountant to see if there are other ways to avoid paying taxes. If you have to finance that equipment, you may be paying for it for the next 5 years just to avoid taxes in 1 year. What will you gain from having that piece of equipment? Will it make your operation more efficient? Those answers won’t be found on a balance sheet. It is more about knowing the details of your operation. Those are really good questions to ask yourself,” Strait-Bok said. “When you are thinking about these purchases, it is important to think about the short-term and long-term impacts of the decision. What will it hinder you doing in the next 2 to 5 years or will it be making you more money in the next 2 to 5 years?” 

Check Also

Eliminating unwanted woody weeds from pastures in the winter

By Dean Kreager, Licking County Agriculture and Natural Resources Educator When you look at your …

Leave a Reply

Your email address will not be published. Required fields are marked *