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Capital budgeting on the farm

Your Farm Business

October 21, 2011
From Wayne Schoper and Rich Baumann , South Central College

Most farm business managers are used to developing and using a cash flow budget for their farm business. They estimate the quantity and sale price of the commodities they plan to produce, and the costs of inputs needed to produce those commodities (seed, fertilizer, feed, etc.). The better farm managers also monitor their actual incomes and expenses during the year to see how close they compare to their estimates, and make adjustments during the year as needed. This is just part of modern farm business management.

Some of the best farm business managers have also been developing and using a capital equipment budget for several years. In developing a capital budget you need to evaluate your line of equipment, buildings, etc. Which pieces of equipment, buildings, etc. will need to be replaced first, and how soon? Which pieces will fit into you operational plans for a longer time period? Will planned business changes expansion, contraction, or a change of direction for the business result in changes to the line of equipment or other capital items you will need in the business? This should allow you to make changes when needed and planned, and take compulsive equipment purchases out of your business. Of course, as with anything else, changes may need to be made to this plan over time, but it will make equipment purchases and the planning for needed financing a more logical part of your business management. You and your lender will have better control of the purchases and financing of your farm business. It could also improve your ability to get financing over time if borrowing money does become more difficult in the future.

Contact Wayne or Rich if you would like to discuss either cash flow planning or capital budgeting for your farm business.



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