As a farmer, the changing seasons bring both challenges and opportunities. Just as you plan your planting and harvest cycles, it’s essential to prepare financially for the year ahead. The new year is right around the corner, and by taking proactive steps now, you can build a solid foundation for a successful and sustainable farming operation in 2025 and beyond.
Here's a breakdown of how you can ensure you're ready for what the coming year will bring.
Review and Update Your Balance Sheet
Your farm's balance sheet is more than just a financial document. It is a snapshot of your operation's financial health at a specific point in time, often aligned with your tax year-end. A complete balance sheet includes everything your farm owns (assets) and everything your farm owes (liabilities), giving you a clear picture of your farm's equity position.
Why it matters:
A well-maintained balance sheet helps you understand the financial strengths and weaknesses of your operation, guiding better decision-making for the future. Whether you’re considering a new equipment purchase or expanding your farm’s acreage, your balance sheet can provide the insight you need to proceed with confidence.
Action steps:
• Make it a priority to complete your balance sheet at least once a year. Your lender can provide a balance sheet template that will help you stay organized.
• Use the year-end as an opportunity to schedule an appointment to sit down with your loan officer and compare year-over-year (YOY) balance sheet trends. This review will highlight changes in your equity position and other key financial indicators.
• Examine liquidity—the assets you can easily turn into cash to cover current liabilities. For example, you sell your crop inventory sitting in the bin to pay for January’s loan payments. Strong liquidity will allow you to take advantage of opportunities or manage unexpected expenses.
Plan for Capital Improvements
Farming is an ever-evolving business, and in order to remain competitive and profitable, making capital improvements is often necessary. This could mean purchasing new equipment, overhauling equipment, completing major repairs, remodeling current structures or even acquiring additional land.
Why it matters:
Investing in the right capital improvements can significantly increase the efficiency and profitability of your operation. However, each investment comes with a cost, so it’s essential to assess whether the funds for these improvements will come from earnings or borrowed money.
Action steps:
• Evaluate the areas of your farm that would benefit most from capital improvements. Ask yourself: What will have the greatest impact on my operation’s efficiency and productivity?
• Consider how these improvements will be funded. Will you use your farm’s retained earnings, or will you need to explore loan options with your lender?
• Work closely with your loan officer to understand the best borrowing terms and rates available, ensuring that you balance the need for improvements with maintaining a healthy financial position.
Focus on Profit & Loss (P&L) Management
Your farm's Profit & Loss statement (P&L) is another vital tool in understanding how well your operation is performing financially. This statement tracks your revenues and expenses over time, helping you evaluate profitability.
Why it matters:
While reviewing the P&L statement on an annual basis is important, keeping an eye on it throughout the year allows you to make adjustments in real-time. Understanding your revenue streams and cost structure ensures that you’re not just breaking even but generating healthy profits.
Action steps:
• Maintain detailed farm record books to track all income and expenses, ensuring that you have the most accurate data possible.
• Identify areas where you may be overspending or where you can reduce costs without sacrificing quality or productivity.
• Use the insights from your P&L statement to refine your budgeting and forecasting for the next year.
Build a Long-Term Plan for Growth
One of the biggest mistakes a farmer might make is to operate without a long-term plan. Each year offers opportunities to grow and improve, but without a clear roadmap, it's easy to lose sight of your larger goals.
Why it matters:
Having a strategic plan in place will help you make decisions that align with your long-term vision for the farm. Whether you want to expand your operation, improve productivity or enhance sustainability practices, setting goals and milestones for the future is critical to success.
Action steps:
• Create an annual plan that includes both financial and operational objectives. What improvements will you make to the farm? How do you plan to increase efficiency or profitability?
• Review this plan regularly and make adjustments as needed, especially after reviewing your balance sheet, P&L and capital needs.
• Consult with your loan officer to ensure that your growth strategy is both realistic and financially sound.
Finding Support from Your Lender
It’s easy to feel overwhelmed when you’re managing a farm, especially when it comes to the financial side of things. However, you don’t have to navigate these challenges alone. Your lender can be one of many valuable partners, offering tools and insights to help you succeed.
Why it matters:
Working with your lender to understand your farm’s financial position and future opportunities can help you be prepared to face whatever challenges the coming year may bring.
Action steps:
• Schedule an annual meeting with your loan officer to review your financial statements and discuss upcoming capital improvements.
• Consider resources and support from your lender to help you make decisions that align with your goals.
By taking these proactive steps now, you can have your farming operation financially prepared for 2025. From maintaining a solid balance sheet to making strategic capital improvements, being intentional with your planning will allow you to overcome challenges and seize new opportunities as they arise.
This blog was originally published in Michigan Farm News.
