FARMERS who understand the total cost of machinery ownership before they purchase perform better as a business, was a key message at a recent farm business update.
David Heinjus, managing director of Rural Directions, said throughout his career he had seen farmers reactively purchasing equipment.
“This is sometimes motivated by deals on offer, rather then the strategic need for the business,” he said.
“Buying machinery is a major and significant cost to the business, so you need to ensure that there will be a return on investment.”
At a recent Grains Research Development Corporation farm business update, Mr Heinjus said calculating the total cost of ownership was a simple but vital tool for decision making.
Total cost of ownership, he said, included depreciation, interest, insurance, registration, repairs and maintenance, fuel and labour.
“There are multiple methods for calculating depreciation,” he said.
“My preference is to use the straight line method, which involves subtracting the salvage value from the original purchase price and then dividing this by the years of its useful life.”
Mr Heinjus said calculating interest accounted for the “opportunity cost” of purchasing, for instance the cost of servicing debt.
“Once calculated, the total cost of ownership figure can then be used to compare the outcome with a contractor, through a number of methods,” he said.
Mr Heinjus said costs need to be offset by valuing risk, or the timeliness of operations.
“Timeliness risks such as delays in sowing, spraying, nutrition can all have significant impacts on the future income,” he said.
“I find if you lose trust in a machine, it’s time for it to go as timeliness is everything.”