Investment is a key part of building and running any business.

Investment in a farm business will be necessary as business conditions, markets, legislation, labour needs, skills provision, technology, and consumer tastes change over time. Machinery and other farm equipment wears, becomes unreliable and requires eventual replacement, and new machinery and equipment has the potential to boost productivity and cut costs.

However, it is essential to avoid overstretching financial resources or restricting the ability to follow other options. Deciding where and when to invest is an essential part of making the most of the business:

  • Any future investment must be part of a strategic business plan.
  • A plan of   exactly where this investment will be aimed is essential.
  • The expenditure on the project must be justified.
  • Costs must be kept in control.

Before an investment is made, it is important to realistically consider how much a business will benefit from the investment. This must be weighed against the potential risks.

In some instances, it may be possible to control risks by phasing investments, for example by installing a new parlour, then reviewing the project to see how it performs, before tackling work to improve or construct new livestock housing.

Most importantly, the financial case for making an investment is a vital part of the decision-making process and an investment must eventually directly or indirectly pay for itself and provide a return.

Investing in the core business

Investment in current enterprises may mean the purchase of new machinery, or a new milking parlour. In these instances the current machinery may be outdated, unreliable or simply not up to coping with an expanding herd or a different method of management.

Likewise, increasing the herd size may make the farm business more viable, but this may entail new buildings, larger milking facilities and the acquisition of more land.

The purchase of more land may help farm growth, effectively cutting costs by spreading overhead costs over a greater farmed area; making the farm more profitable or allowing for family members to enter the business.

Investing in new enterprises

Developing new enterprises on the farm, for example producing dairy ice cream, is an inherently risky process. Due to its very nature, a diversification project may require new skills as it may be an area in which the farmer has little specialist or practical knowledge, particularly when investing in a non-agricultural project. Furthermore, the potential profitability of a new enterprise needs thorough investigation.

Advice may be sought from professionals and a variety of organisations, some of which may be publicly-funded. The tax implications for the remainder of the business also need to be investigated. Any enterprise which involves dealing directly with the public may require specialised insurance and there may be food hygiene rules to follow when producing and selling foodstuffs.

Some financial assistance may be available in the form of grants or loans. As well as funding from the Rural Development Programme for England (RDPE) and similar regional or national organisations; capital and revenue funds are available from public sector, charitable and private sources for farm diversification, which may prove useful particularly for tenant farmers.

Investing outside the business

Many business owners may see the advantages of investing in areas outside their main business. Investment in shares, may for example help to spread risks and investment accounts may provide a greater degree of security than investing in the core business.

Investing outside the business could also be part of succession planning, by planning for investment income or selling investments after retirement to provide an income not connected to the farm business.

As for any investment, the risk of losing the money invested has to be balanced with the expected return, and personal goals also help to define the relative importance of taking risks for business growth or the security of personal wealth.