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The Unexpected Way Equipment Hits Your Bottom Line



The cost of labor can trickle down your balance sheet if you’re housing unnecessary equipment

September 20, 2016    |    Balance Sheet, Planning
When times are good, farmers are more apt to purchase new equipment or update their existing machinery. Acquiring new equipment is a complex decision and there are many factors that go into it: your working capital position, the amount of acres you have and the length of the planting or harvest season. While contemplating what equipment your operation needs, don’t forget about the cost of labor.

The employees you need are directly tied to the equipment you have. An extra combine means your operation needs an additional driver and maybe an additional tractor and cart and semi or two with each needing an operator. Too much or underutilized equipment will have a trickledown effect and result in your operation spending more than necessary. While labor costs will be present on the farm income statement, the cost of unnecessary labor will not be stated. Think of capital as finite. Every dollar you invest in equipment and labor is a dollar that can’t be invested in land or other assets, or used to build working capital.

“Too much or underutilized equipment will have a trickledown effect and result in your operation spending more than necessary.”

Fortunately, there are many ratios which can be used as a general guide to help you plan for labor. Depending on the kind of operation you own, these ratios can be based on how many head of cattle you have, the bushels your operation produces, etc. In addition to standard labor models, there are a few other questions you may want to consider: Does my operation need all the equipment it has? Is the operation making enough net income to support all the family members currently working on it? Are there ways production could be more efficient that could ultimately reduce labor needs? If you haven’t done so, it may be worth investing in a workflow software that can help with more efficient tilling, planting and harvesting. Any labor-related question can be a tough call for any farmer, but if margins continue to tighten, it is worth reassessing.

If you’re only accounting for the cost of principal payments and interest when determining whether to purchase new equipment, you are missing out on the potential cost of labor. Make sure the equipment you plan to purchase is truly necessary for your operation, or you may find hidden labor costs making a dent in your farm’s balance sheet.

Vince Bailey

Vince Bailey is Senior Vice President Credit – Ag Lending and is based in Louisville, Ky. He is responsible for leading the Ag Lending team for Farm Credit Mid-America.

More from this author: How to Plan for an Equipment Purchase, Resist the Urge to Finance Machinery with Operating Credit, Bulletproof Your Balance Sheet

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