As planting preparations are well underway, it’s critical to know your operation’s costs. That’s key information for a farm’s financial success. Your costs include things that come to mind right away – like inputs and fixed costs, but also machinery costs.

A metric you’ll want to be aware of as you get ready to plant is your machinery investment per acre. This is the total value of your machinery across all the acres you farm. It helps show the level of efficiency you’re currently achieving with your equipment line. Knowing this metric can help in recognizing any areas where you could work to increase efficiency.

Lease vs. buy
Here’s a machinery decision that’s been coming up the past few months with our farmer clients: Should I lease or buy this piece of equipment?

The farmer and their ag finance advisor work together to bring insight to that question. Usually, the farmer already has some idea or belief about what the final answer may be, but it can be a challenge to know exactly how either choice will impact the farm’s balance sheet.

One farmer was deciding whether to buy a new tractor or lease one, so he asked his ag finance advisor to help run the numbers and bring another perspective. The farmer’s potential lease payment and potential loan payment were very close in amount, so he wasn’t sure what to do.

The farmer and advisor talked about how the operation’s working capital was tight right now and about how the farmer was committed to preserving it as much as possible. On the other hand, his equity was in a good spot.

To help think through the decision a bit more, they talked through a few questions:

Dig deeper
If you’re facing a decision on whether to lease or buy a piece of equipment, here are a few questions to ask yourself.

Take a look at your farm’s current financial state. If you were to make a down payment and take on an equipment loan, what will that do to your working capital and equity? Will they remain within good ranges?

Next week, I’ll dive into some more details on questions you can use to evaluate equipment leases. If you’re facing a decision on whether to lease or buy a piece of machinery, you may want to talk with one of our ag finance advisors for additional help and perspective.

Read the current issue of the Smart Series publication, bringing business ideas for today’s farm leader. This issue includes perspectives on what to do when a landlord asks for higher rent, how to find the right new employee, a farm business checklist for the spring season, and more. Get your free online issue here.

The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.