Investing profits verses borrowing money to grow/stand still

[lazy farmer]

Taking land out of the equation which unless your either very fortunate or very very talented requires borrowing.
how do you go about deciding whether to invest organically or borrow to upgrade the existing business?
and do you think a business can prosper through internal growth over the long term ?

 

[Rossymons]

I've just been redoing the layout of 3 sheds on our farm as I've started rearing calves. One small example of where I've saved money is on water troughs in my nursery shed. I looked at getting the little bowls where the calves get fresh water by nosing the valve. Priced them up and thought ideal! But hang on - right now I fill them up manually. I fill them up whilst they're suckling on the milk bar and I can monitor how much they're drinking. Why spend a couple hundred to move away from that to stand around waiting? So I didn't buy them.

I firmly believe that easiest pound to make is the one I don't spend to begin with. A lot of times my thinking about decision can easily suffer from mission so now I ask myself 2 questions - does spending this money make my life noticeably easier or does it make me more cash? Both are very important to me.

One area I am investing in is myself the skills I have. That's proving to be the best return I can get anywhere.

Having had a highly geared business it was nightmare keeping on top of the various HP agreements we had in place. It's a very easy hamster wheel to get on because you don't see the financial hole in the bank balance but wahey - theres a new tractor and feeder wagon outside!

I think it's perfectly possible to grow organically with some careful use of the overdraft. The skill comes in knowing what to prioritize the spending on and knowing when to stop as the business has reached its sweet spot.

 

[frederick]

Taking land out of the equation which unless your either very fortunate or very very talented requires borrowing.
how do you go about deciding whether to invest organically or borrow to upgrade the existing business?
and do you think a business can prosper through internal growth over the long term ?

No.

Every business will have big projects even if it is aiming to stand still.
New milking parlour. New cow housing. Slurry. None of them last for ever.
New tractor.
Reinvestment also needs to be continual. The organic approach could mean cash was only available some years. Sometimes the best investments are made in the hardest times.

 

[pappuller]

Taking land out of the equation which unless your either very fortunate or very very talented requires borrowing.
how do you go about deciding whether to invest organically or borrow to upgrade the existing business?
and do you think a business can prosper through internal growth over the long term ?

we have borrowed to expand infastructure in the last 12 months, i couldnt think of anything worse than doing a major project over a few years and possibly stretching cashflow.
But them im an impatiant barsteward

 

[More to life]

historically borrowing has been a no brainer but the calculatior will need bashing more now

 

[frederick]

historically borrowing has been a no brainer but the calculatior will need bashing more now

Why.

My father heavily invested in 70s interest rates were far more than today but inflation sorted it.

Today interest maybe 4-5% but inflation is 10% so you are actually having your debt repaid even before you start to make repayments.
At an interest rate of 2.5% and inflation 1.5% money was actually far dearer.
It's not the financing costs that have changed to make it less favourable it's the uncertainty makes the future more worrying.

 

[More to life]

Why.

My father heavily invested in 70s interest rates were far more than today but inflation sorted it.

Today interest maybe 4-5% but inflation is 10% so you are actually having your debt repaid even before you start to make repayments.
At an interest rate of 2.5% and inflation 1.5% money was actually far dearer.
It's not the financing costs that have changed to make it less favourable it's the uncertainty makes the future more worrying.

Because the margins in the 70s were gigantic compared to today. The days of constantly having machinery on tick are over imo,the initial cost and the cost of money make purchases more marginal.

 

[More to life]

Why.

My father heavily invested in 70s interest rates were far more than today but inflation sorted it.

Today interest maybe 4-5% but inflation is 10% so you are actually having your debt repaid even before you start to make repayments.
At an interest rate of 2.5% and inflation 1.5% money was actually far dearer.
It's not the financing costs that have changed to make it less favourable it's the uncertainty makes the future more worrying.

Your other piont about inflation, if it's not back to 2% within the next 18 months we're really screwed.

 

[frederick]

Because the margins in the 70s were gigantic compared to today. The days of constantly having machinery on tick are over imo,the initial cost and the cost of money make purchases more marginal.

But still in real terms money is cheaper to borrow today than it looked 6 months ago.

 

[More to life]

But still in real terms money is cheaper to borrow today than it looked 6 months ago.

You'll need to explain as I don't understand

 

[frederick]

You'll need to explain as I don't understand

So if you want to build a 100k slurry store today and borrow at 4%. In 12months time the store will cost 110k but with 5% interest the loan will be 105k. So technically building it this year even if you don't repay any loan you will be 5k better off than building next year.

However as said inflation may not be 10% for the next twelve months but inflation and interest rates tend to offset each other.

 

[More to life]

So if you want to build a 100k slurry store today and borrow at 4%. In 12months time the store will cost 110k but with 5% interest the loan will be 105k. So technically building it this year even if you don't repay any loan you will be 5k better off than building next year.

However as said inflation may not be 10% for the next twelve months but inflation and interest rates tend to offset each other.

That's not really the cost of borrowing. More the fact that delays in an inflationary period cost money i've purchased some machinery a year early myself.

 

[onesiedale]

So if you want to build a 100k slurry store today and borrow at 4%. In 12months time the store will cost 110k but with 5% interest the loan will be 105k. So technically building it this year even if you don't repay any loan you will be 5k better off than building next year.

However as said inflation may not be 10% for the next twelve months but inflation and interest rates tend to offset each other.

It is the 100k slurry store that will be the elephant in the room for a lot of dairy farmers in the near future. Especially tenant dairy farmers.
IMHO the grants to be offered on them will be an even bigger elephant - a white one!
It will suck people in to spending money they haven't got on CapEx that isn't needed and certainly will not give a return on capital spent. .
...but that is a completely different discussion.

When growing the business we took out 2 large (for us) loans over 10 and 15 years. That was for cows and field infrastructure. This coming year we will see the back of them.
5 years ago we invested in a brand new parlour and dairy facility. Rightly or wrongly, we achieved that over a 2 year period completely out of cashflow. It was a lean two years, but at least we know now that everything here is bought and paid for. That takes a lot of risk out of the job.

 

[unlacedgecko]

It is the 100k slurry store that will be the elephant in the room for a lot of dairy farmers in the near future. Especially tenant dairy farmers.
IMHO the grants to be offered on them will be an even bigger elephant - a white one!
It will suck people in to spending money they haven't got on CapEx that isn't needed and certainly will not give a return on capital spent. .
...but that is a completely different discussion.

When growing the business we took out 2 large (for us) loans over 10 and 15 years. That was for cows and field infrastructure. This coming year we will see the back of them.
5 years ago we invested in a brand new parlour and dairy facility. Rightly or wrongly, we achieved that over a 2 year period completely out of cashflow. It was a lean two years, but at least we know now that everything here is bought and paid for. That takes a lot of risk out of the job.

That's amazing. Is the business now debt free?

 

[onesiedale]

That's amazing. Is the business now debt free?

errrr. not quite, but we can certainly see a clear way through the next 2 years with no big panic.
And like I said, it is the slurry store regs that will be potentially the biggest threat.

 

[unlacedgecko]

errrr. not quite, but we can certainly see a clear way through the next 2 years with no big panic.
And like I said, it is the slurry store regs that will be potentially the biggest threat.

Have you bought land?

 

[onesiedale]

Have you bought land?

..if only.
1st generation tenant dairy farmer here.

 

[dinderleat]

Taking land out of the equation which unless your either very fortunate or very very talented requires borrowing.
how do you go about deciding whether to invest organically or borrow to upgrade the existing business?
and do you think a business can prosper through internal growth over the long term ?

I like to invest to make my life easier and make the business more efficient, any investments we have made is through cash flow as we are tenants so makes borrowing expensive. Unless it’s machinery then we tend to take advantage of 0% packages to aid cash flow. With the current milk price I would be surprised if you need to borrow unless your looking at a big project. Even then I would just do it in stages.

 

[puppet]

I have always regarded a debt as something to be paid off as soon as possible as it is just like paying someone to sit in the kitchen and the banks have had plenty off me and the taxpayer. Borrowed for tractors, sheds and slurry stores but quick payback usually over 2 years to ease cash flow.
Started from scratch 22 years ago with a job to support us through some difficult times when buying a new gate involved some planning. Then suddenly there is a tipping point when the stock numbers increase and cash is enough to plan some bigger purchases and service a loan..

 

[Blue.]

I’ve only ever borrowed for land,everything else has been done out of cash flow,nothing on finance if I can’t afford it I’ll wait till I can.