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RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.


Purchasing Equipment at Year End?

Nov 20, 2011


As we approach year end, many farmers are making purchase decisions for new equipment. One of the biggest drivers for decision-making is often tied to tax planning and the need to spend money in order to limit tax consequences. There are some obvious advantages in utilizing capital purchases as part of tax planning; however, be sure to consider the fundamental reasons for any equipment replacement.
Ask yourself: What is the fundamental reason for the purchase? What are the benefits of this equipment to my operation? How will this equipment improve my efficiency, productivity, and profitability? How will this capital purchase affect my cash flow?
As your farming operation grows larger it becomes increasingly important to analyze equipment purchases. We all have numerous pieces of equipment or tools which need to be replaced. Often it’s clear on what equipment needs to be replaced, but generally the problem for most of us is that we have limited capital resources. With limited capital it's even more important to prioritize, plan, and analyze each replacement item on its own merit.
To help you work through your capital purchases I've included a Capital Acquisition Questionnaire. I received this tool from a business partner who was a company owner in another industry. This questionnaire is designed to help prioritize and justify a purchase decision. Another benefit is that it illustrates to the suppliers your seriousness in understanding the value of this purchase.
Here is an example of the questionnaire:
Capital Acquisition Questionnaire

Business Location
Capital Item Requisition

1.)     Describe the item and the reasons for its acquisition. Attach pictures and manufacturer’s
2.)     Has the operation of this item been observed in other farms in a working situation
 similar to ours?   Yes         No           if yes, explain in detail the findings, giving name of company               and application.
3.)     Have we obtained competitive quotes? If so, detail below:

Feature Differences

4.)     Attach a brief description of where the new item would be used.
5.)     What would be done with the replaced item?
6.)     Is there a local service representative? If yes, who? If not, where is the closest one and
         who is it? Is the representative a division of the manufacturer or a contracted agent?
7.)     What are the installation /assembly costs including freight and the displacing of other machines?
8.)     How much training is required to operate this item? Describe:
9.) Could these same operations be purchased or custom hired, and if so, have we obtained
       competitive quotations? Explain:
10.) Has consideration been given to the leasing of machines rather than buying, if the useful   life is short or there is danger of rapid technological obsolescence?
11.) Outline and attach the reasoning behind the purchase with calculated return on investment and payback, if applicable.
14.) Comments:
Prepared by:                                                    Reviewed & Approved by:                                                                                                                                                                                                                                        
Action              Approved               Denied  
 If you'd like a copy of this or have additional questions please let me know.
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