Look long-term when making big purchases

Look long-term when making big purchases

Agribusiness
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While some people upgrade machinery regularly, others are happy to keep plant for longer. Some people are "the machinery dealer's dream customers" as they are constantly updating.

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I recently got thinking about the reasons why we purchase items.

When it comes to farm machinery, numbers can get very large, and have long-term effects on cash-flow.

Some people upgrade equipment regularly, others are happy to keep plant for longer. Some people are "the machinery dealer's dream customers" as they are constantly updating.

There is nothing wrong with this, as this provides an opportunity for those who prefer to buy near-new second-hand equipment.

The market tends to sort itself out in the long run.

I would like to think there aren't too many producers that purchase machinery solely on the basis of having the biggest and best equipment in the district.

They may be around, but I don't know them.

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Most of the agribusiness owners I know have a very detailed matrix they follow before purchasing machinery. The list is not exhaustive, but may include the current technology available in that machine, the specifications, such as horsepower, fuel consumption and for some people, wheel spacings are important.

Deep down I suspect the colour of the machine is also relevant. Farmers tend not to change brands very often.

In the same way, they generally don't change banks or accountants much either.

Other major considerations are: the useful life of the machine, and how this aspect influences finance.

There are myriad options in relation to finance, and these can be set up to suit the needs of the particular customer involved.

Additionally, I find more and more agribusiness owners are acutely aware of the financial ratios involved with machinery purchases. In farming it is really easy for the capital investment ratio to get way out of whack.

There is a fine balance between efficiency gains and over capitalisation.

Upon reflection, I think I was guilty of this back in the day. The ego has to be put to one side, and decisions made for the right reason; vanity is not one of them.

There is a fine balance between efficiency gains and over capitalisation.

Keeping the machinery ratio under one should be an aim, this is calculated by dividing 'total machinery assets' by 'farm income'.

It is permissible to exceed this for a period of time, particularly if the machine has a long useful life.

The same principle applies to the loan to value ratio, as this ratio will inevitably blow out when a sizeable land purchase is made, but tends to come down over time, as equity increases, and debt reduces.

A constant theme of mine is the making of decisions that fit within a long-term strategy, and drive efficiency.

These two aspects should be front of mind before any large purchasing decision is made.

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