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Evaluation – the cornerstone of good investment

Investing in your business is a key consideration when thinking about growth, efficiency or staying competitive in the market – but you must fully evaluate your options before making a decision. Oliver McEntyre looks at some of the tools available that can help you do this, and gives some tips to help you secure the finance you need to meet your business objectives.

Deciding on a financing period

Any new equipment should be financed over its useful or productive lifetime. A milking parlour is a good example. With an expected useful lifetime of around 15 years, before innovation and developments overtake the investment, a 15-year financing period would’ve been suitable. It’s important to remember that there’s no hard-and-fast rule and sometimes, the repayment period can have non-financial inputs too.

Investing in your business helps to keep it moving forward. All too often in the world of farming, many see the only worthwhile investment to be an increase in size or production. But there are alternatives in the modern industry.

Think what the investment does for your sustainability

Measuring sustainability is often difficult, but it can be broken down into 3 areas of return

  1. Financial
  2. Social/human
  3. Environmental
Financial return

Providing you have the right figures, working out the financial sustainability of an investment can be relatively easy to quantify. It’s a simple calculation to work out return on investment (ROI):

(Extra income generated and/or costs saved per year / Total funds required for the project*) x 100 = ROI % per year

*including all costs – such as training, interest (if borrowing) and installation.

For example, a piece of equipment costs £240,000. It offers a cost saving in labour of £60,000. The ROI will therefore be 25%.

A 25% ROI per year means a 4-year repayment period. But any financing loan must be structured in the right way to let you repay it comfortably, while also allowing for a little movement in markets. As a result, this type of ROI would probably see a loan structured over 6 years, but this depends on any existing debt being covered by the performance of your business, as well as allowing for partner drawings.

This investment is financially sustainable as long as the reasonable working life of the equipment is over 4 years.

Calculating the total ROI over the working life of the equipment is also relatively straightforward: total return = the financial ROI per year x the useful working life of the investment.

This can be matched against the upfront cost plus any interest payable on the loan (or any interest lost, if using cash to invest), plus installation and training costs.

Social/human return

Some investments can take quite a long time to pay back, without resulting in a large rise in profits – but they may help improve the work/life balance for you and your family. It’s hard to put a monetary value on this, but you might want to think about it when considering where to invest. An investment in labour-saving machinery might not only reduce costs of employed labour, but also reduce the need for management. This could mean you have either more time to manage other areas of your business, or spend more time with your family. Likewise, some investments may make for safer and more sustainable working conditions for everyone involved in the farm.

Environmental return

In modern farming, most investments in machinery or management equipment come with an inbuilt level of environmental management. This can be seen as an investment benefit, especially in an ever-changing world where, post-Brexit, the potential for domestic agricultural policy income looks set to have an environmental slant.

Environmental investment could also have a positive impact on your bottom line. Investment in field mapping for yields in the arable world, for example, could lead to savings in seed rate, fertilisers and spray costs – the less productive areas of a field can be identified, letting you focus on the more fruitful ones.

Conclusions

Business decisions in the farming industry are often interwoven with decisions that affect three or even four generations of a family. The benefits of an investment can often be clouded – or sometimes enhanced – by taking into account the human and environmental factors affecting a decision.

The first consideration, however, should always be ROI.

Simple steps you can take to evaluate your investment

  1. Calculate the total cost of the investment – including any instalment/training/interest costs
  2. Match it against the return or cost saving per year – taking into account the potential for human and environmental impact
  3. Structure the funding in-line with the payback period and the useful lifetime of the investment

Our Agriculture team is here to support you and your investment objectives. Undertaking some of the evaluations highlighted above will help us to understand your key drivers and deliver a solution that meets your financial, human or social goals. Find your local Agriculture Manager

 

This article is proprietary to Barclays Bank UK PLC Group (‘Barclays’). Every attempt has been made to try to ensure that the information contained in this guide is accurate at the time of publication. However, the views and opinions featured in this article are the views of the authors alone, and do not necessarily reflect the views of Barclays nor should they be taken as statements of policy or intent of Barclays. Barclays takes no warranties or undertakings of any kind, whether express or implied, regarding the accuracy or completeness of the information is given. Barclays accepts no liability for the impact of, or any loss, however arising, from, any decisions made based on information contained within this article. You should seek independent financial advice based on your circumstances before acting on any of the information included in this article.

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