Interest: A Cost or An Investment
Recognising that there are ways that you can leverage your farm to increase your net wealth down the track is just one strategy farmers are using to grow their farming business.
Interest sits on the profit and loss statement as a cost or an expense.
If you are increasing the productivity of your property through acquisition of assets such as additional country in the form of another farm or purchasing livestock, we can make use of leverage and pay interest (cost) with a view to increasing our return (profit) in the future.
This leverage can be useful tool to use when looking to increase your net wealth, but there are, of course, accompanying potential risks that would need to be considered before making a decision.
The agricultural industry is particularly well suited to using the farm as leverage for growth and expansion, if it is managed well as part of an overall plan.
Think about this as an example:
- You’ve bought additional country and your net wealth at the time was $5 million
- You had a debt of $2 million
- Looking 10 years down the track, your assets could be worth $15 million, and you’ve kept your level of debt at $2 million
In this example, you’ve used debt and paid interest (cost) to help build your net wealth.
Interest could be deemed an investment rather than a cost.
Click these links to read our other posts on this subject: Improving Cashflow, Growth Opportunities for Your Farm, Our 5 Top Tax Planning Tips.
What do you think about this?
Let me know.
Cheers,
Matt.
