How to improve your bottom line

August 2016

It is easy to talk about making money on a farm; many 'millions' have been 'made' using a piece of paper, a pen and a calculator. The reality is however very different as the drought we have been experiencing has emphasised. Or as we have stated in other articles, farming is not for the faint hearted or 'sissies', and it is the most difficult business to manage.

As with any business it is important to make a sustainable profit that is to make a profit over the long term. This is due to the cost-price squeeze, the greater demand for improved quality of products, higher production per production unit, and so forth. Note that we do not emphasise that you must make maximum profits. The danger of aiming for maximum profits is that one can easily fall in the trap of then exploiting your resources. By this one could make good profits for a couple of years, but eventually you will find yourselves in trouble. Your resources such as soil or grazing will be degraded and not be able to maintain the maximum production any more. Thus sustainable profits can only be achieved when you are a responsible farmer.

Profits are determined by subtracting all expenses from all income. In terms of financial management this is done when an income statement is compiled. The question may be asked why the emphasis on profits? Or phrased alternatively, what are profits used for?

Should no profits be made:

• You will for instance not be able to pay yourself a salary – you work for nothing;
• Should you wish to expand, or improve your farming business you will have no funds available to do it;
• Should you wish to replace movable assets such as a tractor or tools, which becomes necessary with time, you will not have funds available to do it; and
• Should you then wish to do the abovementioned and you need to obtain a loan it will not be possible, because how will you be able to repay the loan.

It is clear that to improve your bottom line, you must first of all take steps to improve your income and contain your expenses as we have discussed in previous articles. We have emphasised in these previous articles to be able to do this you need a proper budget. Be guaranteed that without a budget (plan) you will be fighting a losing battle as far as the aforementioned aspects are concerned. Remember without a proper plan you are on your way to nowhere.

Furthermore, the drought experienced emphasised the importance of farming as technical correctly as possible, to apply conservation farming practices and to farm conservatively, thus to farm responsibly.

Other steps one should consider to improve your profits are to consider if you are maximising, without exploiting, what you are currently farming. Are you using every piece of land you farm to its full potential? Maybe you could use a piece of low potential land or a piece of fallow land to produce something else on. However, this expansion must be considered carefully – for instance is there a market for the product? Will you be able to manage this new enterprise properly? What about funds? In other words make sure you have the finance, equipment, labour, infrastructure, management time and capabilities and market to take on the new enterprise. This then would be a combination of expanding your business, and diversifying and maximising the use of your resources responsibly.

Next, one cannot emphasise enough the importance to diversify. But again you must consider all aspects carefully. However, the advantages of diversifying – improved cashflow, spreading of risks, increasing of profit – outscores the disadvantages.

Also one cannot discuss the improving of profits without referring to the quality of products produced. Always go for good quality products. This will ensure a better income and there is also the hidden benefit of lower production costs resulting in a higher profit. If you produce 200 tons of maize and the majority is grade 1 maize you will fetch a higher income and it will cost you more or less the same to produce 200 tons of grade 1 maize than grade 2 maize.

Something else to consider. As of late, advanced farmers find it more profitable to rather expand their businesses horizontally than vertically. In other words, it could be better to become involved in the processing of your product/s than to produce more of the basic product. Again, careful consideration is needed to evaluate the pros and cons of this step, but it needs serious consideration.

Lastly, any farmer who is honest with himself will admit that there is always room for improvement. Get those improvements in place before you try anything else. And as they say in sport 'stick to the basics' to improve your profit.

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

Publication: August 2016

Section: Pula/Imvula