Introduction

Development refers to changes made by investing capital in a farm to increase its productive capacity, profitability or value. Farm development can mean many things. It can be a small change taking place over a short time and financed from annual profits. More commonly, it is carried out over at least 5-6 years and is financed by relatively substantial borrowings for capital investment.

Why develop a farm? This is usually done in order to maintain or increase income, and/or to increase the value of the farm assets. The benefits of development are reaped by selling increased crop production, converting extra feed into saleable livestock and products, selling assets at a higher price, using improved borrowing power, or by a combination of these. Some examples of farm development are:

Development budgeting involves a series of annual cash flow budgets, generally drawn up until the development is complete and the annual results are stable, i.e. have reached a ‘steady state'. Development budgets are designed to show expected future costs and returns associated with a development programme. They are the basis for deciding whether or not to undertake a project, for obtaining finance, and for monitoring it once it gets under way.

There are usually many alternative ways of carrying out a proposed development project. Each has different risks and costs, and some forethought and preplanning can help rank these alternatives. If credit is needed to finance the project (which is the usual situation), a development budget is an essential first step in obtaining funds. Once the project is under way, development plans and budgets are a useful basis for control and revision of plans.

Development budgeting uses the techniques of cash flow budgeting. Fairly detailed physical planning of a development project is first necessary to be sure that it is technically feasible before any budgets are drawn up.

Return on extra (marginal) capital

Where a programme of property development is considered, the probable return on investment is an important preliminary criterion for decision-making. The technique is discussed in detail in Chapter 10, but we will review the main points here.