Equipment decisions and Capital Budgeting

You have identified that you need a certain piece of equipment to operate or expand the farm.  Should you buy out right using working capital?  Borrow to purchase?  Lease, rent or hire someone else to do the work? 

Decisions on equipment acquisition can have a dramatic impact on the financial viability of the farm.  Fixed and operating costs need to be considered. Passing of required purchases may impact your ability to increase revenues and efficiency, reduce stress and manual labour and improve rotations. 

Equipment decisions should factor:

• Whether you are replacing an existing item or acquiring something new
• Whether the equipment is new or used
• Both the fixed (i.e. purchase) and the operating costs (repairs and furl)
• The duration and scheduling of the time required
• Resale value
• Opportunities for generate revenue via custom work
• Alternative to accomplish the same task such as renting, custom or borrowing 
• The skills required to operate, maintain and repair
• The amount of time that required by the owner and staff
• The accessibility or service and new parts
• The short and long term tax consequences and benefits
• The number of functions the equipment can perform
• Potential additional purchase requirements (larger tractor, equipment sed, etc…)

Capital Budgeting is an effective analysis tool to take the above information and compare the full cost and benefits of different equipment options over the short or long term.  Effectively planning equipment and asset ownership and access can help manage financial risks by budgeting for expenses, working equipment costs into the farm’s cashflow budget and understanding current and future value of equipment.  Knowing the value of equipments and assets is critical to understand the farm’s financial performance and return on investment.

Resources:

OMAFRA Factsheet: Budgeting Farm Equipment Costs
www.omafra.gov.on.ca/english/busdev/facts/01-075.htm

Iowa State University Extension
Acquiring Farm Machinery Services: Ownership, Custom Hire, Rental and Leasing
www.extension.iastate.edu/Publications/PM787.pdf

Business Owners Toolkit: Deciding to Make a Major Purchase
www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_6100

Alberta Agriculture: Buy Lease Capital Budgeting Calculator
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/bmi9118
This software program will help you calculate the least costly option when considering whether to lease, rent or hire custom work of farm capital assets.