Published:

04/26/2014 04:27am

How Do I Know If An Investment Is A Good Idea?

As a business owner you have opportunities pop up once in a while. But how do you decide if you should take advantage of the opportunity or not? I want to show you some simple management tools you can use to help make this decision.

One of the first things I like to look at when it comes to making a decision involving money is to look at how the opportunity will affect your cash flow. If you do not have a projected cash flow statement you need to make one. It shows you exactly when and how much money you expect to pay in the future and if you have the income to cover those expenses. This helps you to plan out sales and also loan requirements.

Once you have the cash flow statement plug in the additional payments into the cash flow and any additional income or reduction in expenses that will result. Now look and see what it does to your overall numbers. I would also try to project this out 3-5 years as well using estimated cash flow statements. This will give you a good picture of how this will affect your operation and if it is a good fit.

When putting these changes in make sure to take into consideration the following things. Does this purchase increase your time on farm or decrease it? Make sure to adjust your wages accordingly. Is this a piece of equipment that will replace an existing piece? If so how will it affect your repair bills? Will it reduce your fuel consumption or increase it? If this is a land purchase how will that land effect your other expenses and income. Is it pasture land that will reduce your yearly feed bill, if so by how much and does the additional cost offset the feed savings? Does the additional land allow you to purchase more animals? If so does the additional income for a larger herd offset the purchase costs.

These are just a few or many things you need to consider when it comes to how purchases will affect your cash flow. I believe cash flow is one of your most important factors because let's be honest, we need to make money at this business!

Another area to look at is your time management. Does this opportunity affect the amount of time you spend on the farm? Are you able to manage the additional time required or does this require additional help? If there is additional help we go back to cash flow and is it still a good opportunity even with the additional wages? Also consider the availability of quality help. It seems that good quality help can be difficult to find some days.

These are just a few things to help you in making smarter decisions on your farm. This is just scratching at the surface though.

Jen Gutfriend,The progressive livestock producer's profitability coach, works with progressive livestock producers who struggle with low profitability and lack of time. She helps them reduce costs, increase revenue, all while having more time to do what they enjoy! Get her free video lesson, "Learn the one biggest change you can make on your farm to increase profitability" at www.livestockmanagementsolutions.com