How Do Decide I When It’s Time to Replace My Farm Equipment?

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agrisolutions 15 things to know about farm finances ebook

old tractorNext to farmland that you own, your machinery is most likely the second largest investment that you make into your farm business. As such, it's important to make well informed decisions about its maintenance and management. To protect your investment in farm equipment, follow these tips.

 

Keep up on regular maintenance.

Giving your farm equipment your timely and consistent attention will enable you to get the greatest value out of this investment. Daily and seasonal maintenance is essential to keeping your equipment running as smoothly and reliably as possible, which helps to control production costs and maximize operating profit. Regardless of how carefully you maintain your equipment, however, you will eventually encounter the need for repairs. The cost of repairs will depend on many variables, including the type of equipment and the technology features attached to it. After repair costs are established, you’ll have to decide whether they’re worth the expenditure or if it’s time to buy new equipment.

 

Compare the real costs of repair vs. replacement.

Cost involves much more than a price tag or repair estimate. When you’re weighing the benefits of replacing your equipment against those of repairing it, be sure consider these factors:

  • Is the equipment under warranty?
  • Does the needed repair involve technological components that can only be serviced by highly trained technicians? If so, the cost will likely be higher.
  • How old is the equipment? The older the machinery, the higher the cost of owning and operating it is likely to be. Consider that additional repairs may be needed in the near future.
  • Has the equipment been repaired before? How confident are you that it will reliably serve you at critical points in the year, such as planting and harvest? If it breaks down at one of these times, what potential losses would your farm business suffer?
  • How up to date is the technology attached to the equipment? Would a newer model allow you to increase production, efficiency, or otherwise contribute to your bottom line?

Understand your farm’s financial picture.

If new equipment initially seems to be a better investment than repair, you’ll then need to assess your farm’s financial picture. To do this, look at liquidity measures such as working capital, current ratio, and cash flow, as well as solvency measures such as the farm’s debt-to-asset ratio.

For example, suppose that a farm operation wants to sell or trade in and replace its current combine and heads, which it owns free and clear. This would have multiple effects on farm’s finances:

  • Depending on the trade-in value and assuming financing for the new equipment, the farm’s working capital could be impacted in the range of $30,000–$50,000 due to the resulting current portion of long-term debt; this impact would continue each year until the loan is repaid.
  • The farm's debt-to-asset ratio would increase.
  • The projected budget would be reduced by the amount of the principal and interest payments for the new equipment.

To determine whether purchase or repair is the more financially sound choice, the farm operator must compare these financial impacts to the real cost of repairing the currently owned equipment.

 

Enlist professional help when you need it.

If you’d like assistance with making decisions about your farm’s machinery or believe your farm operation could benefit from agricultural financial consulting services, contact the experts at AgriSolutions. We specialize in helping family farmers become more effective business managers and keep their farms thriving through future generations. Click the link below for a free consultation.

FREE CONSULTATION

 

 

Written By

Brian Bennett

Brian Bennett

Consultant

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