Cashflow lets a farming engine run smoothly

February 2025

YOLANDI KRUGER, AGRICULTURAL ADVISOR AT DUNAMUS

RUNNING A FARMING BUSINESS NORMALLY HAS TWO DISTINCT CHARACTERISTICS TO BE SEEN AS SUCCESSFUL: IT HAS TO BE SUSTAINABLE (CONSERVING AN ECOLOGICAL BALANCE BY AVOIDING THE DEPLETION OF NATURAL RESOURCES) AND IT HAS TO BE PROFITABLE (YIELDING PROFIT OR FINANCIAL GAIN).

Although it seems simple, most farmers dedicate their whole careers to achieving and maintaining these goals. Maybe you decide to implement a sustainable method of producing something to find out that it is not be a profitable method, or you strive for profitability at the cost of sustainability.

A profitable farming business is one where the income that is generated from selling products or services is higher than the expenses that are incurred to generate the income. The author Sol Luckman said: ‘It takes money to make money.’ As a farmer, you have to spend money to produce goods or services to sell and generate an income.

The typical expenses for a farming business include salaries and wages, electricity, input costs, telephone costs, insurance, repairs and maintenance, amongst others. These expenses have to be covered monthly, whether you receive an income or not, and can pose a challenge to farmers.

Think about a crop farmer who gets an income only once a year after harvesting and selling his/her crops, or a livestock farmer who only gets an income when calves or lambs are sold. This is what makes farming unique – the fact that you work in natural production cycles and do not receive a regular income but have to make provision for regular expenses.

A farm operating on a well-planned positive cash flow is like the performance of a well-oiled machine – the machine’s engine, bearings and gears operate smoothly, and the machine can perform well. A well-oiled machine does not break down easily and tends to endure longer. So how do you ensure a well-planned positive cash flow and a well-oiled farming business?

STEP 1: PLAN THE CASH FLOW
The first step is to do a cash flow projection for the farming business. Start by writing down the expected income for the next twelve months – what income are you expecting (how much) and when (in which month)? Then write down the expenses in the same manner (how much and when), so that you can see how much money you need each month and if the income will be sufficient to cover the costs.

The difference between the income and expenses is called a surplus or deficit. A surplus occurs if the income is higher than the expenses, and a deficit occurs if the expenses are higher than the income.

During the months when you generate a surplus (after selling crops or livestock), the surplus needs to be saved to make provision for the months of deficit to continue covering the expenses, although there is no income in these months.

Planning the cash flow is a crucial first step so that you as the farmer and financial manager knows what to expect from the next year’s financial projections, and that you can make provision for the months when the business will have a financial deficit.

STEP 2: EVALUATE THE SOURCES AND FREQUENCY OF INCOME
To generate a surplus/profit, a farmer can do one of two things: Increase the income or decrease the expenses. Depending on your type of farming business, increasing the income is not as easy as it seems because the income depends on the yields you obtain and the prices you get for the products. However, you can ensure that you do everything within your control (production practices, planting time and applying the right inputs) to the best of your ability with the available resources. 

If the income is not sufficient to cover the expenses, evaluate ways to increase the income from your current production (higher yields or prices). If this is not possible, evaluate ways to generate an alternative source of income for your farm.

Some ideas for extra farming and non-farming income may include:

• Do contract work with your equipment to generate an income.
• Offer services to other farmers or businesses in your community (transport, delivery of inputs, accommodation, etc.).
• Evaluate other enterprises that can be beneficial to your farming business (chickens for meat or eggs, vegetables or livestock that can supplement the farm’s income).
• See if you can sell your product in other months, when the prices are traditionally higher.
• Look for part-time employment for yourself or your family members to supplement the household’s income.

Evaluating the sources and frequency of the farm’s income will help you get a clear picture of the expected income for the next year and to determine if there is any room for improvement on the income side.

STEP 3: EVALUATE THE NECESSITY AND SCOPE OF THE EXPENSES
As soon as the expenses have been listed in the cash flow projection, it is a good practice to go through the expenses line by line and evaluate the expenses critically according to their level of necessity. 

• Asking the following questions may help:
• Is this expense really necessary for the farm to operate?
• Will this expense contribute to an increasing income, efficiency or saving of other costs?
• Can I procure this item at a cheaper cost elsewhere – or can I negotiate a lower price with my current supplier?
• Can I save on using this product/service more sparingly?

Most of the time farmers say their expenses are ‘cut to the bone’. But whenever you go through this exercise, you will see if there are still areas for improvement. When trying to cut expenses or save costs, start with the highest expenses where the savings will have the biggest impact on the farm’s cash flow.

However, a note of caution: Do not save on costs where the saving will hurt your production – for example, do not save on buying and applying less fertiliser. The savings will have a greater negative impact on your yield and subsequently, your ability to generate an income. 

STEP 4: GET CREATIVE
When you have followed the first three steps and the farm’s cash flow is still too tight and raising concerns, it is time to get creative. Think of alternative ideas to increase the farm’s income or decrease the expenses. 

Talking to other farmers, reading articles or magazines about agriculture, and attending training or study groups can also help you stimulate your thoughts. There are so many success stories of farmers who, in times of trouble, had to introduce a new enterprise, buy or sell in groups (as a cooperative), or start a new venture to make ends meet.

The sky is the limit and South African farmers are known for their ability to rise to challenging times and make plans to overcome it. Whatever idea or solution you pursue, make sure it is something that you would like to do, have a passion for, and will be able to do properly and successfully. Do not chase after ‘profitable ideas’ because someone told you it is highly profitable. Evaluate every opportunity thoroughly, prepare a cash flow projection and talk to experts in the field about its feasibility.

Your business is a running machine – check the oil (cash flow) frequently and top it up to ensure the business is running like a well-oiled machine, performing well and standing the test of time.

Publication: February 2025

Section: Pula/Imvula