Finance: Budgeting for machinery

Calculating a machinery budget is a logical process and one that, if followed methodically, will give access to the latest machinery while ensuring the business is placed on a viable footing capable of riding the volatility in the market.

Target levels of investment
Farm type Target investment (£/ha)
Combinable crops (eastern region) 140ha 740
Combinable crops (eastern region) 600ha 494
Root crops (depending on crops grown) 990-1235
Livestock 40-120ha grazing 250
Livestock 40-120ha dairy 494-740

All businesses will have a figure specific to their circumstances and it will be influenced by many parameters, from enterprise size and mix to business structure and strategy, but it is important to find the right balance to ensure that business is not over-burdened with costs it can’t sustain.

According to Gary Markham, director of agriculture at accountants Grant Thornton and author of the book A Blueprint for Machinery Management, the first point to consider when calculating the farm’s machinery budget is to incorporate only the cost of moveable machinery, such as powered machines and their attachments. The cost of fixed equipment such as sheds and grain driers should be omitted.

“I believe that the main driver of machinery cost management is the capital (value) per hectare. This then largely dictates the depreciation, repair costs and replacement part costs, but it is important to calculate the cost of depreciation accurately to minimise a profit or loss on the sale of machinery appearing in the accounts as this can distort the true position of the business,” he says.

“By following a capital cash flow budget, tracking sales and purchases of machines based on a planned machinery strategy, it is possible to manage capital costs in a manner that produces a viable business that is capable of responding to changes in the market and that makes effective use of new technology to a decent and timely job. It’s just a case of ensuring the investment is at a level appropriate to the business while ensuring that the annual fall in capital cost is matched by re-investment,” says Mr Markham

An analysis of the accounts of Grant Thornton clients suggests that most arable businesses have a capital cost of £568/ha (£230/acre). This varies from year to year as expensive items such as combine harvesters are changed, but Mr Markham’s point is that it is important to consider the average on-going value per ha of all moveable machinery.

His analysis suggests that over a five-year life cycle tractors and combines will depreciate at 15% a year (using the reducing balance method); machinery attached to tractors at 20% a year; farm vehicles 25% a year and office equipment at 30% a year. From here it is possible to get an accurate impression of the true costs a business incurs through its machinery policy. For budgeting purposes, a weighted average of 18% can be used.

The capital value in our example arable farm of £568/ha can be reduced through various changes in business strategy. For example, machinery syndicates typically aim for a capital value of £444-469/ha (£180-190/acre). The target capital on a farm of about 600ha would be £456/ha.

It is important to realise that depreciation is a function of investment and one should not be driven by the level of depreciation, but by a target level of investment.

Although depreciation of most farms should be 18% of £568 (£102/ha) which is reflective of what is actually happening in the business, the target depreciation is 18% of £456/ha (£82/ha).

See more