Financial Balancing Act: Why You Need A Capital Expenditure Budget
Are you looking at purchasing a few big-ticket items for your farm due to higher profitability? Before you increase your fixed assets, define your goals and set limitations — in other words create a capital expenditure budget.
A plan for capital expenditures is simply when and how a business cash flows capital assets, explains David Widmar, economist at Agriculture Economic Insights. The assets can include machinery, facilities, farmland, etc.
To create a plan, Widmar first recommends reviewing past activity. Next, consider your cash flows. Include debt service payments and non-debt purchases such as machinery leases.
Finally, look ahead. What needs replaced or upgraded? What are all your cash flow obligations?
You can take various approaches to your capital expenditures plan, says Brent Gloy, economist at Agriculture Economic Insights.
- A few strategies include:
- Allocate an amount each year.
- Save up to seize an opportunity.
- Layer on investments to push business growth.
- Reduce expenses as you plan for retirement.
“The most important thing to do is to write down your plan; you can always change it,” Gloy says.
