It is never too early to plan ahead. When doing so, be sure to anticipate changes. The second part of this statement is usually what deters some people from planning in the first place, but don’t fear, change is inevitable. With that being said, the calendar will be turning to fall soon, which means the end of the year will be here in a few short months.
Speaking of changes, let’s address the effects of weather. We should recognize that drought will have a negative cashflow effect in some of our areas. Other parts of our territory have taken advantage of good yields, increased commodity prices, and in all, a cash flow year that hasn’t been seen in a while. All of this may lead to some year-end tax planning with topics of prepays, capital purchases and depreciation, and even asset transfer. When it comes to tax, be sure to have up-to-date farm records to your accountant for a yearend estimate.
My message here today is the same one I have had with many customers over the years: Be sure to prioritize prepays at yearend over capital purchases. Yes, it is more enjoyable to kick tires when you have been given permission to spend money; however, prepaying upcoming inputs and supplies is basically an equation of maintaining your working capital. You are just adjusting where you placed it in the balance sheet. It may no longer be cash in the checkbook, but it is still a cash asset, and usually has a positive effect on cost savings of the input.
There are a few factors to consider if you go this route. First, you have the risk of unknown yields next harvest season. It also doesn’t come with the depletion of the asset over the next couple years on something that we may or may not have really needed in the operation, which are sometimes found with year-end purchases. Finally, prepays that go unused can usually be adjusted, or the cash moved to another input, thus still having an impact to your operation in the form of a paid expense somewhere, if cashflow changes negatively and a paid expense is beneficial to have.
None of us know what the future holds or what next year’s market changes to either our income or expenses will be. Sometimes we think we have a good idea, but if we have all learned one thing since the beginning of 2020, it is to plan for change. Prioritizing prepays at yearend usually has a positive return on investment in more than one way while providing balance sheet working capital for financial strength to your farm and some security for the unknown future.