Year-end Financial Planning For Farmers

By Frank Wardynski

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.