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Best Practices for Managing Machinery Costs

Originally published on agdirect.com

Although tracking the costs of owning and operating farm equipment requires considerable time and planning, it is important to the success of every operation, especially when managing tight profit margins.

“Lower commodity prices have made all farm expenses more visible,” says Mary Anne Mullen, vice president of AgDirect Credit. “Producers are taking a closer look at their finances to find ways to reduce costs and increase profitability. Machinery and equipment costs are a big component in determining the overall financial strength of their business.”

Establishing a baseline

According to Mullen, one of the first steps producers should take to control their equipment costs is to prepare a budget at the beginning of the year.

“Setting a goal allows you to monitor your progress throughout the year and make adjustments along the way. Whether you measure profitability by cost per acre or cost per hour, the key is choosing a metric, being consistent and evaluating your costs regularly.”

At minimum, Mullen recommends calculating costs on an annual basis, but she points out the benefits of a monthly or even quarterly review.

“If you’re analyzing your equipment line-up once a year, it can seem like a hassle. But if it is a regular part of your financial management, it feels more like operating a gearshift – second nature.”

Using a benchmark  

Once a budget has been set and metrics have been selected, Mullen says producers can use financial benchmarking to measure their farm equipment efficiency and pinpoint where improvements can be made to increase profitability.

“It’s one thing to know what your equipment costs are, and another to know how those costs compare with other operations of a similar size and scope,” she explains. “Having a good benchmark or peer group is an important aspect of understanding your machinery costs.”

Land grant-based data is one resource producers can rely on to compare their machinery costs. The United State Department of Agriculture and some farm accounting software applications can also provide producers with references for comparing liquidity, solvency, financial efficiency, asset turnover ratios and machinery investments.

“Benchmarking allows producers to identify underlying costs of owning and operating farm equipment and reveals true cost of production,” Mullen says. “Ultimately, this can help you set realistic expectations of what your equipment is worth and what you can comfortably afford.”

Analyzing asset use

Because machinery purchases are one of the biggest investments made in any operation, another best practice for managing machinery costs includes analyzing asset use.

“Owning an entire equipment line might seem like a good thing, but it could be money down the drain if you’ve acquired pieces that aren’t being utilized,” says Mullen.

“Evaluating asset use allows producers to weigh some of the trade-offs such as owning versus leasing or owning versus custom hiring. It can also help you avoid overvaluing equipment when it’s time to sell or trade,” she explains.

Mullen reminds producers to consider ownership and operating expenses before making equipment purchases, too.

“Whether you’re buying new or used, spend some time calculating all of the costs involved including variable costs such as labor and parts availability, and, be mindful of warranties,” she adds.

No matter your equipment needs, AgDirect can help you finance them. To learn more about AgDirect, contact your local FCS Financial office.

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