Every farm requires periodic upgrades and improvements, both large and small, to remain competitive and profitable.
Approaching these projects with an organized decision-making process can make these potentially confusing situations more manageable, according to Elizabeth Higgins, a Cornell Cooperative Extension business management specialist.
“When choosing among different projects, one factor to consider is the time dimension,” Higgins said in a recent webinar. “The longer the time horizon, the more uncertainty about your estimations.”
A building, for example, could be a 20-year investment, while a specific crop is usually a one- or two-year investment.
To make a capital budgeting decision, cash flow must be considered across the project’s entire expected life.
Higgins suggested a five-step process for farm owners to follow before making important investments:
1. Identify and prioritize projects that need doing.
2. Determine the project’s cost, including maintenance and the revenue the investment should generate.
3. Make predictions about the future.
“What do I think this market will be in five years? How much am I going to earn? How long do I plan to do this business?” Higgins said.
4. Make your decision.
5. Implement the decision, and evaluate and learn based on the outcome.
Consider how a produce grower might choose between building high tunnels or a greenhouse.
Hypothetically, a farmer could buy 10 high tunnels for $100,000 that have a useful life of 10 years and generate annual net profits of $15,000 each, or $150,000 total per year.
Or the grower could spend $125,000 for a greenhouse that lasts 20 years and generates $100,000 per year.
Both projects will be profitable and potentially would have a greater than 5 percent return on investment.
The greenhouse would generate more income, but over a significantly longer time frame, while the high tunnels would pay for themselves more quickly.
If two options’ overall returns are similar, a shorter payback period is preferable.
Farmers should also consider the complexity and timing of the projects.
An investment might hog time better spent on other jobs, and it might require extra or specialized help to manage.