We must recognise that farm business decisions on the use of capital depend on the circumstances of the individual farm,” Mr W G Furness told members of the Greenmount Association at the association’s spring conference last Thursday.
“They will vary according to whether the farmer is primarily seeking the highest return on his capital or is already making a good income and wishing to consolidate this and improve the value of his property.
“For those building up we should not be very concerned with what has gone by. We must ensure that each decision to be taken in the future is sound and in keeping with the long-term plans and prospects for the farm.”
Quite often there were various opportunities for the use of additional funds which should be recognised, he pointed out.
“If capital is scarce in relation to land, buildings and labour we should select uses which will provide high and relatively quick returns per £100 additional capital invested in the short run. Careful phasing of the stages of an investment can have an appreciable effect on the time needed to reach an objective,” he stated.
As additional funds become available long-term prospects and earnings assumed greater importance, added Mr Furness.
He said that when building up a business high risk activities should be avoided but for the established business the possible high returns from participation in some ventures with a greater degree of uncertainty might justify their consideration at least as far as part of the business assets were concerned.
“With intensive use of capital the rate of return on additional investment will tend to fall because we shall have used up the opportunities to secure very high returns and as additional capital is utilised to improve the property and quality of stock earnings may not immediately ensue,” he warned.
“If funds are borrowed the rate of return required should exceed the interest rate payable by an amount which will allow recovery of capital, payment of tax and provide an appropriate buffer against fluctuations due to risk and uncertainty.”
When surplus profits were being ploughed back into a farm business, Mr Furness said that in theory at least they should be used were they would produce a return after tax at least as good as could be secured from an investment the farmer is prepared to consider outside his own business. But in relation to land purchase and some other investment decisions rate of return on capital was not the first consideration, he said.
“It is, however, important that the consequences for the business as a whole are appreciated in taking these decisions,” he declared.
“Whilst in practice decisions on the use of capital in farming do not depend solely on the ‘rate of return’ to be expected – calculation and study of the potential returns in the various possible uses should enable better decisions to be taken.”
Earlier, Mr Furness had referred to the growing interest in returns on capital in and pointed to the fact that the farmer was being frequently reminded that in effective business organisations is the chief criterion of efficiency was the highest possible return on capital.