Year-end financial planning for farmers
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EmailDecember and January are great months to look at farm financials. You can finish up last year’s accounting, create a balance sheet and get set up to start the new year.
As the year draws to a close, now the ideal time for farmers to review their financial management practices and prepare for the year ahead. This season offers a unique opportunity to project farm profitability, make informed tax planning decisions, and strengthen your operation’s financial health.
Step 1: Review your accounting system
Accurate recordkeeping is the cornerstone of sound financial management. If you’re still relying on handwritten ledgers, consider upgrading to an accounting software program. These tools are affordable, user-friendly and significantly improve accuracy. They allow for instant calculations, quick report generation and easy categorization of income and expenses by enterprise. If you’ve fallen behind on your records, now is the time to catch up—your future self will thank you during tax season.
Step 2: Prepare a year-end balance sheet
Surprisingly, many farmers skip creating a year-end balance sheet often because it seems intimidating. Michigan State University Extension educators and specialists recommend all farmers complete a year-end balance sheet. It is a straightforward process once you understand the concept. A balance sheet provides a snapshot of your net worth—everything you own minus what you owe. Tracking changes in net worth from year to year is essential for understanding profitability.
For example, a young farmer building a breeding herd may see lower revenues because fewer animals are sold, yet the farm’s value increases as more breeding stock is retained. This growth is reflected in the balance sheet, even if cash flow feels tight.
Step 3: Analyze key financial ratios
Your balance sheet isn’t just a document—it’s a powerful tool for assessing financial health. Ratios such as liquidity (ability to meet short-term obligations) and solvency (long-term financial stability) help you understand whether your operation is on solid ground or carrying too much debt. These insights are especially critical for farms in their early stages, where debt levels can be high.
Step 4: Conduct a year-end financial analysis
Finally, combine your accounting records and balance sheet to perform a comprehensive financial analysis. This process accounts for all income and expenses as well as changes in net worth, giving you a clear picture of farm profitability. Understanding these numbers now will help you make strategic decisions for the coming year.
Actionable tips for farmers
- Update your accounting records before year-end.
- Schedule time to complete your balance sheet—don’t put it off.
- Calculate liquidity and solvency ratios to gauge financial strength.
- Use your analysis for tax planning and setting realistic goals for 2026.
Financial management may not be the most exciting part of farming, but it’s one of the most important. By taking these steps now, you’ll position your operation for success in the year ahead.
If you are looking for help in this area, I am always trying to find more farmers willing to let me help. I can explain how to do this and make it understandable. I understand confidentiality. I can either make the trip to your farm, or we can meet online via Zoom. Just give me a call or send me a note at 906-884-4386 or wardynsk@msu.edu.
