Before you say yes to that big farm purchase

Look beyond the price tag

A purchase might make perfect sense for the farm, but the real cost isn't always what's on the invoice.

For example, taking on a new tractor or piece of machinery could reduce contractor costs or improve efficiency, buying additional land could increase your productive capacity, investing in irrigation or infrastructure could improve production or reduce future costs.

But each decision also comes with financial consequences.

How will you pay for it? What will it do to your cashflow? How much debt will you take on? What will the repayments look like? And what happens if the season doesn't go exactly to plan?

These are the questions worth answering before you commit.

What does it do to your cashflow?

Farm cashflow can change significantly depending on the timing and size of a purchase.

A farm may be profitable but still experience periods where cash is tight.

So before making a significant investment, it's worth looking at how the purchase affects your cash position over the coming months and beyond, not just whether you can make the purchase today.

Consider:

• What cash do you have available?
• When will the payment need to be made?
• What other large expenses are coming up?
• How will loan repayments affect your monthly or seasonal cashflow?
• Will the purchase reduce the cash available for drawings?
• What happens if production or milk income is lower than expected?

Running these numbers can highlight potential pressure points before they become a problem.

What is the return?

Not every good farm investment has to pay for itself immediately, but you should understand what you're expecting the investment to achieve.

Will it increase production? Save labour? Reduce contracting costs? Improve efficiency? Reduce risk? Increase the farm's capacity for the future?

Looking at the potential return on investment can help you compare different options.

For example, if you're considering buying machinery rather than continuing to use a contractor, the question isn't simply “Can I buy the machine?”

It's: What will it cost to own and operate it, compared with what I'm currently spending?

And if you're looking at additional land or infrastructure, you may need to consider the impact over several seasons rather than simply the first year or a few months.

Don't forget the tax implications

Tax can also influence the decision, but it shouldn't be the reason you make it. Depending on the purchase, there may be implications around depreciation, GST and your taxable income.

It's important to understand those implications before making the investment, rather than making a purchase purely because it creates a tax deduction.

A tax saving doesn't make an investment profitable.

The investment needs to make sense for the farm first.

What are the different options?

Sometimes the best answer isn't simply buy it or don't buy it.

There may be several ways to structure a decision.

Could you:

• buy outright?
• finance the purchase?
• lease equipment?
• delay the purchase?
• buy second-hand?
• invest in something else instead?
• make a smaller investment now and reassess later?

Looking at different scenarios can give you a much clearer understanding of the risks and opportunities involved.

For larger decisions, it can also be useful to look beyond the current season.

What does this decision mean for next season? And the season after that?

This is where good advice adds value

The numbers aren't there to tell you what decision to make, they're there to help you make a better-informed decision and at MBS Advisors, we can work with you to look at the wider financial picture before you commit to a significant farm investment.

That could mean modelling the impact on cashflow, looking at debt and financing options, considering tax and depreciation, assessing the potential return, or comparing different scenarios.

The question may not be whether you can afford something, it's more like whether it is the right investment for your farm, your goals and your future.

So before you sign the paperwork, take the time to run the numbers.

Talk to MBS Advisors about the decision before you make it - not just the accounts after you've made it.

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We are more than just year-end accounts. Contact MBS Advisors here.

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