Should I?

How often do we have opportunities present themselves in business? But how do we decide if it is a good opportunity or not? Here are a couple ideas to help you.
The first thing I would do is plug the data into your cash flow statement. How does the cost affect your bottom line? Does your current revenue stream cover the added costs? Does the expense bring in additional revenue?

Let's use the purchase of an additional 25 head of bred cows for your farm as an example. Let's say that each head is $1000, so a total cost of $25,000. Plug that additional $25,000 into your cash flow. Does it create any negative cash flow months? If so, do you have a line of credit or other way to cover it? If you finance the purchase how do the payments affect your numbers? Now look at the additional revenue stream it brings in. Compare it to your previous numbers. Are you more profitable with the additional cows?

The next thing I would look at is your cost of production, (COP). Pull out the your COP budget worksheet and add in the additional $25,000 expense. How does this affect your COP? Based off your estimated earnings are you still making a profit? I would also do this for the following year as well showing the additional cows without the purchase cost, and how it will affect your future earnings.

Aside from revenue you also want to take time into consideration. Will this new purchase allow you to reduce your time spent on an existing task? Will it require more time?

Let's use a new seeder for example. You put in 400 acres a year of greenfeed crops and it currently takes you about a week to complete. You are looking at purchasing a larger seeder. The new seeder would allow you to finish in half the time. If the weather is bad in the spring this can allow you to finish within a shorter window of opportunity. This also means you are spending less time on the tractor and have that time now available for other activities.

Another thing to look at is will the purchase save you money? This is really effective when looking at new machinery. Look at the purchase of a new tractor. Your old tractor is starting to have problems and cost you on average $500/month is repairs. You have the opportunity to purchase a tractor with full warranty for $500/month. Though it is the same cost you now guarantee a set monthly expense as well as a reduction in down time. If you were to keep the old tractor and more problems showed up your cost and down time would increase.

A rule of thumb I like to use is once your machine starts to cost more for repairs than a payment on a new machine it is time to trade up. You will save a lot of money and time on repairs as well as reducing your stress level when things break down.

These are just a few tools to help make those big decisions. Just make sure you evaluate every opportunity and make sure it is right for your farm. We want to see you happy and profitable!