Capital investment starts with better questions, not bigger chequebooks
Over the past couple of weeks I’ve been lucky enough to spend some time in the Flinders Ranges. Along the way I was struck by the number of stations that have diversified into agritourism. From Rawnsley Park Station through to other properties across the region, there has clearly been significant investment in creating new income streams.
It got me thinking.
It’s easy to look at these businesses and conclude that building accommodation or tourism experiences is a good investment. But that’s only half the story. The better question is whether those investments stack up for that business.
Coincidentally, I recently presented to Adelaide University students undertaking the Livestock Consultancy course, where we spent time exploring partial budgeting. It was one of the topics that generated the most discussion. Once people understood the concept, they quickly realised it applies to almost every decision made on farm.
Partial budgeting isn’t about building a complicated spreadsheet. It’s about slowing down long enough to challenge the assumptions behind an investment.
Too often we ask, “Can we afford it?”
A better question is, “Will this actually improve the business?”
Every investment changes four things.
What additional income will it generate?
What costs will it reduce?
What new costs will it create?
What existing income or opportunities might it reduce?
Working through those questions forces you to think beyond the purchase price.
Take the agritourism example. Building accommodation may create a valuable new income stream, but it also introduces maintenance, marketing, cleaning, insurance and the opportunity cost of your own time. For some businesses, those trade-offs make perfect sense. For others, they don’t. The investment isn’t good or bad in itself, it depends on whether the numbers and assumptions hold true for that particular business.
The same thinking applies whether you’re considering a new tractor, more subdivision fencing, electronic identification equipment, buying additional land, or employing another staff member.
One of the biggest traps I see is falling in love with the investment before testing the assumptions.
We often estimate the benefits generously and underestimate the costs. We assume labour will somehow become available, seasonal conditions will cooperate and everything will work exactly as planned. Reality usually sits somewhere in the middle.
This is where another set of eyes can be incredibly valuable.
Whether it’s a consultant, your accountant, your bank manager, or simply another respected farmer, asking someone to challenge your assumptions is one of the best investments you can make. Not because they’ll always have the answer, but because they’ll ask the questions you may have overlooked.
Sometimes a single question can save hundreds of thousands of dollars.
Before making your next investment, try asking yourself:
What assumptions am I making?
What if those assumptions are wrong?
What would need to happen for this investment to pay for itself?
Is this the best use of my next dollar?
Good investments rarely begin with the purchase.
They begin with asking better questions.
With Purpose,
Nathaniel