New Year Party Plans - The last checklist for the year

Roland P. Freund, Regional Farm Management Agent, Pa.
December 14, 2001

Let’s complete this year's business before we celebrate the New Year! The calendar gets very full with church, family and fun celebrations at this time so business tasks tend to end up on the back burner. But prudent farm managers will take steps to save taxes, know if they have accounted for finances accurately, and collect the information needed to accurately measure this year's business performance. Essential tasks for the year-end “To-do List” includes:

Pay all bills due
This is a good business practice, and it simplifies the task of preparing the list of accounts payable if there are none! Each dollar spent could save you 50 cents or more in taxes.

Count your blessings
2001 has been an incredibly good milk price year. At this season give generously to your church and charities. Not only will you share your blessings, but contributions give you the same tax break as advance purchases of feed or supplies.

Complete farm records
Next year starts a new record period for most farmers. Confusion reigns when two sets of books are used simultaneously, so it is important to get all available transactions recorded promptly. However, it may not be possible to finally close the books until some statements are available. These include bank statements giving you the amount of interest and principal to record.

Take inventory
The end-of-year inventory is essential for analysis. For accuracy it should be completed before you retire New Year’s Eve, but having to use a flashlight can be cumbersome! If it is done carefully every year balance sheet changes can be calculated for necessary accrual adjustments.

Bank balance-sheet forms can be used to record the information. Computerized systems should have them built in. If you need a worksheet or spreadsheet call 717-240-6500, or Email rfreund@psu.edu. The “Dairy Farm Feed Cost Control” spreadsheet can help with silo capacity and such computations. Go to http://capitaldairy.cas.psu.edu/, click on “Tools Archive” and scroll down to download it.

The “Current Assets” section of the inventory includes “Growing crops”. Enter the value of seed, fertilizer/lime, and fuel invested. Record Crops for Sale and Feed including feed in mill storage and prepurchases.  Significant supplies of fertilizer, chemicals, and semen must be listed and valued. Feeder livestock and growing heifers should be included. “Accounts receivable” (milk check, crop/livestock sales etc.), and “Cash Balance” (checking + savings + under mattress) must be accurately recorded to make any cash flow check reliable.

Feed and livestock inventories should be valued at a conservative farm-gate value. That means market price less commission, less the cost of getting them to the selling point. If the auction sells a single ton of hay for $150, buyers might only offer $110 for each of your1,000 tons of hay equivalent at your farm.

As a rule of thumb consider each Dry Matter Ton of haylage to be worth no more than a ton of hay made from the same cut. To convert high-moisture shelled corn to its dry bushel equivalent use the formula: Pounds wet * D.M (as decimal) / 47.36. Example: (50 tons at 70% D.M.) is 100,000 pounds * 0.7 / 47.36 = 1,478 bushels. For ear corn use the factor 59.2 in the formula. With heifers it may be appropriate to change values to reflect the market swings, but keep them conservative.

Update list of Capital Assets
Your accountant needs information on sales and purchases of all capital assets to maintain the depreciation (basis) record. But you need to do your own Fair Market valuation annually.  Unless you are planning to sell out, avoid wild fluctuations in dairy cow values, and don’t escalate land values annually. These gimmicks can seriously distort analysis. Aim to reduce the value of equipment in inventory and dairy buildings and structures by 10 to 20% annually.

Begin Liabilities list
Even Enron could not ignore their debts for long! Bank statements will furnish information on loan activity later. You need to pay particular attention to unpaid bills – especially those over 60 days due - and credit card balances. These are the vipers that are poised to strike you.

Be Patriotic
Plan to pay taxes. Family living draws and principal payments on non-depreciable land, family residence or gold bars can (with very few exceptions) only be paid with AFTER-TAX dollars. A family with four exemptions spending $50,000 on the above should expect to “render unto the Caesars” of Federal, Social Security, State and Local a total of $13,000. If they spend $75,000 or $100,000 they can anticipate tax bills of $22,000 and $32,000 respectively. If exempt from Social Security the same family would expect tax bills of approximately $7,000, $13,000, and $20,000 at the 3 levels cited above.

To have such levels of these benefits and consistently go to extreme measures to pay lower taxes is called fraud. Using debt to finance tax avoidance can create future economic hardship.

Enjoy the Festivities
Getting a good start on these tasks will help you to have greater joy and peace to face next year with courage and hope. Have a blessed Christmas.