How to apply proper financial management

August 2015

Why are you farming? Yes, you like to farm but surely the real reason is because you want to make money, therefore your business must be financially successful.

How do you know your farming business is financially successful? There is but one answer to this question – you must determine it by applying proper financial management. Whether you like it or not, it is paperwork.

Today’s farmer should be thoroughly familiar with the numerous management functions, regardless of the size of the farm business. Although all the management functions are important, it is the financial management of the farm business that brings everything together. Defining and monitoring farming activities in financial terms will give the farmer an overview of the entire farm business, which in turn will result in better informed business decisions. Financial management is not only the link between all aspects of the farm business, but also “oils the wheels” that allow the business to function more effectively.

Practically the first step to proper financial management is to obtain and keep all so-called source documents for all transactions related to your business where money is involved (directly or indirectly). In all instances a source document will be a piece of paper, such as bank statements, bank and deposit slips, purchase invoices (including till slips, cash slips, petrol slips), sales invoices and delivery documents and so forth.

The name source documents, is derived from the fact that these documents are the basis of financial management. Without these documents it is TOTALLY IMPOSSIBLE to manage the finances of your business properly.

As the second step to apply proper financial management you need to record all the source documents in some way or the other. The recording needs to be done in order to eventually compile the three financial statements that are required for financial management. The three financial statements being:

• An Income Statement which determines the financial result – profit/loss of your business.
• A Balance Sheet determining the financial position of your business. This relates to the ratio of assets to liabilities of your business. Is your business in a safe position – solvent, or is your business at risk? Do you have a lot of liabilities?
• A Cash-flow Statement indicating whether your cash inflow is greater than the cash outflow or vice versa. Practically, this statement indicates whether you will have enough cash available at any specific time, such as at the end of a month, to meet all your commitments. For instance, the paying of wages, electricity bill, monthly payments on accounts, and so forth.

In order to apply proper financial management the three statements should be available at least every month and as close after the end of a month as possible.

Certainly many of you will be saying you cannot do this – you have not got the time and/or you do not have the knowhow and/or my business is small, I do not need to do it. Unfortunately, these are only excuses.

In all the articles thus far regarding management we have always emphasised if you cannot do something yourself you must get someone to do it for you, maybe a family member or somebody from the outside. This person will then be known in common language as your bookkeeper. If it is someone you have appointed to do the job it will increase your costs because the person will have to be remunerated. However, it will be money well spent.

This bookkeeper must be provided with all the relevant source documents and must then record them and compile and provide you with the financial statements as mentioned every month. And then assist you to analyse and compare the financial statements with your budgeted (planned) statements to determine whether you are still on track with your business and what is the financial position of your business. Ensure that the bookkeeper knows how to compile the financial statements for management purposes for a farming business. The layout of financial statements for management purposes for a farming business does differ from that of other businesses because of the practical differences between the businesses and it differs from the way financial statements are set up for tax purposes.

With today's modern technology (computers) it is possible to do this work and have the financial statements available immediately even after each and every transaction. You can even determine the effect of a transaction on your finances before the time. Should your business be small and you cannot really afford a computer the financial record keeping can be done manually. A financial record keeping book to be completed by hand and that is very easy to use is available.

In closure, in order to manage your farming business properly you need someone as a bookkeeper to assist with the proper financial management of your business. The bookkeeping function is very much an integral part of your business.

Article submitted by Marius Greyling, Pula Imvula contributor.
For more information, send an email to mariusg@mcgacc.co.za.

 

Publication: August 2015

Section: Pula/Imvula