The hidden costs of writing off new equipment

first_imgShare Facebook Twitter Google + LinkedIn Pinterest During good times, farmers are more likely to make an investment such as purchasing new equipment. But even if the equipment has been written off, there can be hidden costs to owning it further down the line.“When assessing the current equipment on hand, take the time to calculate the principal cost and the interest on a per-acre basis,” said Vince Bailey, vice president credit – agribusiness, Farm Credit Mid-America. “Keeping the big picture in mind is an ideal way to determine the stress an investment may be putting on your operation.”If you have chosen to forgo the tax write-off and depreciate your equipment instead, make sure you continue to keep the principal in mind. Once the equipment has been depreciated, it’s easy to lose track of the fact that the depreciation has become greater than the initial principal.The employees you need are directly tied to the equipment you have, so after reevaluating your operation’s equipment, take the time to assess labor.“Too much or unnecessary equipment will have a trickle-down effect and result in your operation spending more than necessary, Bailey said. “While labor costs will be present on the farm income statement, the cost of unnecessary labor will not be stated.”Fortunately, there are many ratios developed to help you plan for labor, which can be used as a general guide. Depending on the kind of operation you own, these ratios can be based on the number of cattle heads you have or the bushels your operation produces.Pay special attention if you’re making money but your working capital position continues to decline.“If you’re noticing your working capital position or margins declining, take care to assess the depreciation of your equipment and labor costs associated with unnecessary equipment, said Bailey. “There are many costs that can have a negative impact on your balance sheet that may not be apparent if you’re using a tax return to track your operations expenses.”Revisiting the true costs of your equipment and reassessing labor can each go a long way to ensure your operation’s financial health.AUDIO: The Ohio Ag Net’s Ty Higgins visits with Farm Credit Mid-America’s Vince Bailey about the hidden costs of writing off new equipment.Farm Credit Mid America Full Interview Vince Bailey 9.19.16For more financial tips, insights and perspectives from Farm Credit Mid-America visit e-farmcredit.com.last_img

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