Part 2- Considerations before making a big-ticket spending decision
Introducing a new blog series. This is the second blog of a four-part blog series full of valuable information for your farm business.
Now that you understand the Importance of a Farm Business Plan
and have spent the time putting a business plan
together to guide your decision making process, you are ready to take that next step. Begin by implementing the various aspects of the plan. One of those aspects will likely involve some type of sizable purchase. For farmers, a big-ticket spending decision can range from a piece of equipment such as a tractor to a large land purchase. However, the success of your farm operation not only relies on good planning but also strategic purchasing decisions. Here are three tips to take into consideration before making a purchase:
1. Do the research and don’t be impulsive – in the same way most farmers conduct research before trying a new plant variety, spray program or crop type. When making a big ticket purchase this same level of research should be employed and the following items considered:
i. Will this fit with my existing operation?
ii. What are the key benefits to be realized?
iii. What is the financial impact of this purchase?
Additionally, in areas where expertise may be vital, lean on the advice of professionals to further understand the ramifications. Having a relationship with a few trusted advisors including lawyers, accountants, lenders, appraisers, and realtors can provide valuable insight as to additional considerations before diving in head first.
2. Evaluate the different options for gaining access to the item needed – the typical focus when acquiring a big ticket item is on how to acquire the item outright. While this is certainly an option, the ability to utilize a lease or short term rental agreement is also a viable option that could provide access to the needed item and should be evaluated. When deciding whether to buy or lease you should:
i. Think long term: Will I still need this facility or equipment in my operation 3-5 years from now?
ii. Evaluate the financial impact: How much cash will be needed upfront? What is the affordability of payments in the event of a down year?
iii. Make sure it fits your business objectives: Will this commitment leave you unable to complete another more important business goal?
3. Buy with cash or utilize financing? – There really is no right or wrong answer to this question, as the best option will be based on your individual financial circumstances. Before making this decision you should take stock of your financial situation. Once you have done that consider the following before making a decision:
i. What is the rate of return you are earning on your cash currently versus the rate of return expected from the new purchase?
ii. Where are interest rates? The lower the interest rate available the more sense it might make to utilize financing.
iii. Are there differences in the tax ramifications that would make one more favorable than the other?
By doing the research, evaluating the options and taking the time to make the right buying decision you will be better positioned for success and comfortable in the choices that you make towards achieving your dreams.
At Farm Credit of Central Florida, we provide financing for farms, land and homes. For more information visit us at www.farmcreditcfl.com or call us at 863-682-4117.