Man­ag­ing for Profit

Busi­ness man­agers re­quire skills in four key ar­eas: pro­duc­tion, mar­ket­ing, hu­man re­sources, and fi­nance. The last of these is a chal­lenge for many South African farm­ers; if you’re one of them, it’s time to up­grade your fi­nan­cial lit­er­acy.

Farmer's Weekly (South Africa) - - Contents - BY PE­TER HUGHES Pe­ter Hughes is a busi­ness and man­age­ment con­sul­tant with 30 years’ farm­ing ex­pe­ri­ence. Email him at farm­er­[email protected]­ton.co.za. Sub­ject line: Man­ag­ing for profit. FW

Few jobs test your skills like busi­ness man­age­ment, and few busi­nesses can be tougher than farm­ing! Na­ture is a harsh taskmas­ter, and any farm man­ager as­pir­ing to make a suc­cess of farm­ing needs a wide range of bal­anced skills, not to men­tion some rare char­ac­ter traits.

South African farm­ers’ pro­duc­tion skills are gen­er­ally ex­tremely high. The suc­cess they achieve in one of the world’s most wa­ter-stressed coun­tries says it all. There is lit­tle you can teach lo­cal farm­ers about ex­tract­ing high yields and qual­ity prod­ucts from their farms, and they seem more than will­ing to spend money on ex­pert ad­vice to fill in the knowl­edge gaps.

Un­for­tu­nately, the same can­not of­ten be said about mar­ket­ing and hu­man re­sources. But it is ac­count­ing where there’s a real black hole. To put it bluntly, the fi­nan­cial lit­er­acy of many farm­ers is at kinder­garten level, which is why they tend to leave their fi­nan­cial mat­ters to book­keep­ers or ac­coun­tants. As long as there’s cash to pay the bills, no time or en­ergy is spent in mea­sur­ing the ac­tual fi­nan­cial per­for­mance of the busi­ness. This is like play­ing a game with­out both­er­ing to keep score as you go along.

PER­CEP­TION AND RE­AL­ITY

I al­ways wanted to farm. My de­sire was driven by the naïve per­cep­tion of the way of life it seemed to of­fer. I grew up in a small town, and my par­ents were friends with a neigh­bour­ing farmer. His farm shed, with its trac­tors, ploughs, mow­ers and halfdis­man­tled en­gines, was a mag­i­cal place for a child. There was the smell of moist soil turned over by the plough, the clat­ter of sheep shears, the round­ing up of cat­tle, and the low­ing, jostling and splash­ing as they plunged into the dip tank.

These were the things that in­spired me. Even as a teenager, I never had an inkling that be­hind it all was a tough, un­for­giv­ing busi­ness, which, if badly man­aged, would put a quick end to the way of life.

In my school­days, we se­lected one of three streams: aca­demic, com­mer­cial (which in­cluded book­keep­ing) or prac­ti­cal (metal and wood­work). Eg­gie, the wood­work teacher, was also my rugby coach, so my choice was easy, but Dad ve­toed it. Since book­keep­ing was a com­plete mys­tery to me, I chose the aca­demic op­tion. Big mis­take.

Af­ter agri­cul­tural col­lege, my first job was with a big mixed farm­ing com­pany, and it went well. I un­der­stood the prin­ci­ples of crop pro­duc­tion, beef and chicken hus­bandry and dairy­ing, but I had to learn to set a plough, sur­vey a con­tour and weld a bro­ken im­ple­ment. Then, as time went on, I was drawn into the com­mer­cial side of the busi­ness, and the trou­ble started.

‘In­come’ and ‘ex­pen­di­ture’ I thought I un­der­stood, but when the ac­coun­tant men­tioned that de­pre­ci­a­tion needed to be added back to profit to cal­cu­late cash flow, I was com­pletely be­wil­dered.

When words such as ‘ac­crual’, ‘amor­ti­sa­tion’, ‘cur­rent ra­tio’ and ‘head­line earn­ings’ en­tered the dis­cus­sion, I re­alised I was il­lit­er­ate in a key part of the busi­ness, and would strug­gle to be a suc­cess un­less I changed that.

SUD­DENLY I GRASPED THE GRAPHIC REP­RE­SEN­TA­TION THEY GAVE OF THE BUSI­NESS

I plucked up courage and braved the trip to down­town Jo­han­nes­burg to at­tend a ‘Fi­nance for Non-Fi­nan­cial Man­agers’ course, and the scales fell from my eyes. Sud­denly, a bal­ance sheet, in­come state­ment and cash flow made sense, and I grasped the graphic rep­re­sen­ta­tion they gave of the busi­ness.

UN­DER­STAND­ING

The me­chan­ics of book­keep­ing re­mained some­what ob­scure to me (they still do), but my new­found un­der­stand­ing of the ‘big­ger pic­ture’ gave me con­fi­dence to ques­tion the ac­coun­tant.

The joys of be­ing in­volved with the land are many and var­ied, but un­less you know how to pre­pare an op­er­at­ing and cap­i­tal bud­get, what de­pre­ci­a­tion means, and what op­por­tu­nity and mar­ginal cost are, you’ll never get the best out of your busi­ness.

If you find your­self mys­ti­fied by some of these words and con­cepts, get to work on build­ing up your fi­nan­cial lit­er­acy.

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