TWO-IN-ONE: Champion producer and superb financial manager

October 2016

 
The business of being a farmer can be explained as being ‘the efficient employment or combination of all resources, human and physical, to achieve the aims of the farming business’. In practical terms this means to manage your business properly.

When considering the aims of a farming business, one dare say that the overall or most important aim would be to make a sustainable profit. Please note we are not saying a maximum profit. Yes, there could be additional aims such as to improve the standard of your living, to have a happy workforce, and others. However, all additional aims can only eventually be achieved if a profit is made.

To be able to make a profit the farmer of today must produce products that are acceptable to consumers in terms of quantity, quality, taste, appearance, health, ethics, price and what consumers need. Thus, a successful farmer today must be a champion producer.

Not an easy task for a farm manager considering all factors beyond his/her control, influencing the business. But to continue to survive as a farmer it is necessary to be financially successful on a sustainable basis. Therefore you need to improve your business continuously form year to year.

Before 1994 under the controlled marketing system the emphasis for a farmer was to be a producer and as long as he had money in the bank it was fine. After 1994 things changed dramatically for farmers. Controlled markets were abolished and changed to free marketing. All of a sudden a farmer had to become a marketing manager in his/her own right. With this, to have money in the bank was not good enough anymore. Now the emphasis was on making a sustainable profit. This posed a major challenge and increased the emphasis on sound financial management.

In the primary production process farmers are price takers both in terms of income (price) and expenditures. Both income and expenditures increase over time, however at different levels. This causes the so-called cost price squeeze. To be able to produce at a profit and overcome the cost-price squeeze a farmer must increase income and/or reduce or at least control all expenditures. To increase income you have to produce more by either expanding horizontally (farm bigger by buying more land) which is not always possible and/or expand vertically (produce more from a specific unit of production – more maize per hectare).

Of course another way of expanding horizontally is to become involved in value-adding to the basic product. 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 financial consideration is needed to evaluate the pros and cons of this step. Farmers are finding this to be profitable and are rather expanding their businesses horizontally than vertically. Thus now the modern farmer is becoming a business manager.

To address all these challenges it has now become very important to pay serious attention to the financial implications of addressing these challenges. To decide if you are going to be successful to increase your income in what way possible and to manage expenditures, you need sound financial information. You cannot make this decision by only considering production matters. You must know what the expansion or change is going to cost? Have you got enough money (capital) available to finance your new plans? If not where can I obtain capital to finance my plans? Thus in today's farming businesses financial matters plays a far greater role than in the past.

Bear in mind the four main activities of financial management is first of all to gather and re-work all financial information to compile the necessary financial statements. This will then enable one to determine the financial result (profit/loss), the financial position (solvent or insolvent) and the cash-flow position of the business.

Secondly, to analyse the financial statements to determine the progress of your business.

Thirdly, to pay attention to investment decisions. What will the profit be used for? To improve and/or expand your business? Or to include a new enterprise or to progress into value-adding.

Lastly, to pay attention to finance decisions – how will you finance your future plans. Will you be using your own funds (profits) or will you borrow money?

The business of farming has changed and will change progressively in the future with new challenges. The financial success of farming today is less dependent on you just being a good production manager, but more dependent on how good a financial manager you are also.

To face the challenges of the ever changing business environment the modern farmer, big or small, must be a champion producer but also a superb financial manager – therefore a skilled business manager. You will have to allow yourself time to become financially literate, it is of the utmost importance.

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

 

Publication: October 2016

Section: Pula/Imvula