3 Steps to Take Before Making Capital Purchases
When money is tight farmers find themselves analyzing past capital purchases. Maybe you bought a used feed truck, and now that you’ve put $30,000 into repairs, it seems it would have been wiser to buy a truck with fewer hours? Most dairy producers can think back on a past capital purchase and question whether it was the right choice.
Matt Lange with Compeer Financial, explains the following three steps every farmer should think through before making a capital purchase.
1. Determine if the purchase is necessary. First, Lange says farmers must ask three important questions. “Is the purchase going to replace poor-performing equipment?
Does this purchase help part of a larger expansion? Does the purchase increase the efficiency of production on our farm?” he asks. If you can answer yes to all of those questions, then according to Lange, there’s good reason to make the purchase.
2. Prioritize purchases. “Ask yourself if the purchase is urgent or important,” Lange says. Will the purchase help you meet specific goals like expansion or efficiency? Can it wait a few years?
According to Lange, some purchases farmers are anxious to make now could actually wait. “Maybe you want to buy a new feed truck, but could get by with your current truck for a couple of years,” he says. Wait on making purchases you can wait to make. Is the purchase you’re interested in part of your five year plan? Lange says those kind of purchases are fine to budget for now. A chopper is a good example.
Some capital expenditures require lots of research. Don’t just go build a new calf barn without thinking through how it will fit your operation, for example.
3. Manage assets appropriately. “Once we have made that significant investment, how are we financing it?” he asks. If you use some cash for the purchase, don’t let it compromise your cash position down the road.
Lange says you must maximize the purchase to its full value. “A lot of times with any capital investment in the dairy operation, we want to make sure that we've attributed the right resources and the right amount of time dedicated to each asset so we're getting the maximized return on it,” he says.
“Undoubtedly, any time we make any capital investment, we always have to ask the question, ‘If I do this, what may it prevent me from doing later down the road?’” he says.
A downloadable worksheet to walk through these steps is available here.