Take the stress out of major year-end purchases – Ohio Ag Net
By Matt Reese
It doesn’t take long to do the big math – good yields and high prices made 2021 a strong financial year for many Ohio farms. Many land sales and farm auctions give farmers options for spending their money in 2021, but the more detailed calculations about those major buying decisions can get a bit trickier.
Melanie Strait-Bok, regional vice president of farm loans for Farm Credit Mid-America, strongly encourages careful thought with farm lenders before making hasty year-end decisions that impact a farm for many years. future.
“I know it’s not everyone’s favorite thing, but it has an incredible impact on operations when we can compare balance sheets to income tax returns and understand what’s really going on,” Strait-Bok said. . “The first thing we want to see from a farmer at the end of the year are updated inventory levels. We really need to dig into that balance sheet and say, ‘OK, what has changed since the period last year that we need to take into account and update the balance sheet’. Most people aren’t going to spend New Years Eve sitting at their desks, but I would say in the last week of December or at least the first or two days of January, you should take the time to sit down and update balance sheet items, especially those that have an impact on your working capital. These items could include the inventory of any grain in stock, silage, livestock, advance payments you have made, acres of wheat you may have. These numbers can change dramatically. Sit down and write them down at the end of the calendar year, then set that appointment with your lender on the calendar.
With a lender, it is then important to review all the details and objectives of the transaction to get a clear financial picture.
“When you think about the year-end date you have with your lender, it’s a really important time to sit down and say, ‘This is what happened in the last 12 months.’ It may only take an hour or two. It’s also good to share what you plan to do over the next 12 months. What could happen 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 business is going and what your needs are. Get an accurate balance sheet so we can understand and see these changes from year to year and compare it to your tax return. We all know we don’t want to pay more taxes than necessary. Sometimes this tax return does not give us an accurate picture of what has happened in the past 12 months. Having that conversation to understand what happened, how it impacted the balance sheet, and then comparing it to the tax return, that’s how we get a really good picture of your financial situation. Then we can see what you want to do over the next 12 months and how it will impact your financial situation.
This careful examination of the farm’s financial condition is especially important before major year-end purchase decisions.
“If you have any idea that a property might be in the market, call your financial agent and get pre-approved so you have that peace of mind and take the stress out of trying to negotiate a price. ” she said. “What would be the maximum price you would be willing to offer?” If you buy this property, will it impact your purchase of the family farm that you know will be up for sale over the next 2 years? We need to make sure that you understand all the implications now for your future financial situation. It gives you a chance to sit down and say, “This is the number that I know is my cash. This is what will happen to my working capital, this is what my creditworthiness looks like and this is the maximum number that I am willing to invest in this property without having any implications in the years to come. ‘ It takes away some of the emotion when you actually bid at a live auction. Taking that emotion out and being able to know the number will really help your operation from a financial standpoint. By knowing these numbers, the stress is removed from the situation if you are contacted for a private sale before the end of the year.
Equipment purchases at the end of the year also benefit from this type of financial understanding.
“Do you really need this equipment or are you buying it just to avoid taxes? If the answer is 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 this equipment, you might pay for it for the next 5 years just to avoid taxes in 1 year. What will you gain from having this piece of equipment? Will it make your operation more efficient? These answers will not appear in a balance sheet. It’s more about knowing the details of your operation. These are great questions to ask yourself, ”said Strait-Bok. “When you think about these purchases, it’s important to think about the short-term and long-term impacts of the decision. What will it keep you from doing in the next 2-5 years or make you more money over the next 2-5 years? ”