Recently at the Northeast School of Agricultural Lending, I co-lectured with Dr. Ed LaDue of Cornell University. He did an excellent job discussing the financial implications of expansion on the farm business. Here are some of his thoughts.
- When expanding, make every attempt to overestimate initial capital needs by a minimum of 10%. With inexperienced contractors or periods of supply shortage, add 25%.
- Attempting to do the work yourself may take away management from critical areas in your business. Time with suppliers and contractors often results in neglect of other important components of the business.
- Sometimes the allocation of time and money are overlooked for training and development of new employees and managers. Also, machines may not be compatible with the size and scope of new enterprises and acreages.
- Be careful of paying for capital items out of cash flow. This may result in a liquidity crunch 12-24 months later, particularly if an economic downturn occurs.
- Are you expanding for ego or profit? The professor indicated that too many people expand to be challenged and escape the boredom of everyday routine. A minimum return should be rate of return on assets greater than the cost of monies.
While many of you folks in the West are not receiving rain, it will not let up here on the East Coast. This is bad news for those of us with hay to get up. All we seem to be getting is rain and bull dairy calves. My business partner Alicia indicated that her dad had only six heifers out of the last 50 calvings. While my ratio is not that bad, the customized beef business may be looking good!
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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