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SW MN | Long time lurker first time poster. I always enjoy the insight and ideas across all of the forums. Anyway, non earning assets are really the killer. Think lake homes, recreational aircraft etc. As others have said cash flow of the operation in its entirety is one of the most important factors when considering making purchases reguardless if they are financed or not. Using cash for purchases can in some instances lead to having to utilize operating loans at higher levels so you are kind of robbing peter to pay Paul.
Long term assets really are not meant to be liquid. Can they be liquidated,yes if absolutly nessesary, but liquidation of these assets should really be reserved for extreme circumstances or retirement, divorce, death etc.
From a collateral perspective bins and buildings sure do have value and are collateralized all the time.
Any lender worth their salt will do earned net worth anyasis to recognize the investment in the structures. It isn't as if you are not getting any credit for the investment on the balance sheet.
To answer your question at some point can the investment in long term assets have an impact on the ability to make machinery purchases or rent other ground, you bet. Again cash flow plays a major part here. If you paid cash for the majority of these purchases it is fairly easy to "term out" your purchase. You used the cash for the initial purchase, but now need it to buy equipment. Use the equity in the long term assets to fund the machinery purchase. Now if you financed the long term assets to begin with and is already straining our cash flow well. That is an issue as likely the financing associated with the underlying asset matches or closely matched the useable life of the asset. Because of this it is difficult to stretch out terms if needed to free up cash flow because they are already on longer terms.
You see over capitalization more often in the intermediate section of the balance sheet. Where having to much machinery and associated debt or leases hampers someone's abilty to make long term purchases such as bond or land.
So long story short if you used cash to build your long term asset base you are fine. If you have grown via financing to a large extent, That makes life a little more difficult
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Finance question about assets
