When I was a young trainee Chartered Accountant of 19 we had no money in my family, widowed mother and twin younger sisters. On the way to an audit job I discussed with my senior the prospects of Mum or me borrowing some money from the bank . I’ve always remembered his words -“You should never borrow for consumables. Only borrow for capital expenditure on some asset that will last for long time like a fridge, car or furniture.” We may have been considering a washing machine, radiogram or to have the house painted. I painted the house myself anyway.
Whatever it was, I absorbed the message very well and I have never borrowed money for any reason other than to buy and asset. It is generally important not to borrow money to cover farm losses. Better to stop spending and stop the losses.
Decades later I hunted around for a property on which to run sheep and found one in the middle of NSW for which we were able to pay cash. We loved it. Wool prices were good and so we made reasonable profits there.
But I wanted to protect against drought so I built a couple of smaller dams and then decided on a 20,000 yard dam in a large paddock. I learned about “spreader banks” to catch the water and spread it over the paddocks. Great idea, so I borrowed from the bank and spent a good bit of money on it and the dams. In the end the spreader banks did not do what we hoped and sheep would have done as well out of a 5,000 yard dam there instead of the 20,000 yard .
When I subsequently purchased beef cattle property originally settled by my great-grandfather I became enthused about cell grazing and fenced one valley into cells. Because I spent half my life on the road driving around NSW consulting farmers who were in trouble with banks and getting a good hunk of their debts written off, the cell grazing could not really be properly managed. For all the years it operated I do not believe that we ran one extra cow in those paddocks. It was not the fault of the cell grazing system.
I chalked them up to experience. They were not good investments because I had failed to do my homework and see what would work for me in my circumstances.
Those two were about my only bad capital purchases. A visitor one day remarked that he liked the farm, adding “but the only problem is that the fences are all the same age – old.” I replied that I ran the farm to earn income, not to make it look good. As I grew older and we sold off blocks to keep the place to a size we could manage on our own, I confirmed that new fences would not have run more stock or increased the sale value.
But if you are fencing or building sheds or even buying the block next door, on a bank loan, do the sums. Work out what it will cost and how long before you get your loan paid off out of the extra profit you earn. If you are not good at figures, sit opposite your accountant for half an hour and you should have the answer. If not call me at GBAC and I might be able to tell you over the phone for free.