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.
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.
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.