Can the farm afford you?
Why do you farm? Most farmers would instinctively answer ‘I love farming’ or ‘I enjoy being close to nature’ or something similar. Would you still enjoy farming if your farm cannot pay you a salary?
To earn a salary you can either work for yourself or you can work for somebody else and earn a salary. In the process of earning a salary you trade your skills, training, qualification, experience for income. When you work for someone else and earn a fixed monthly salary.
If you are your own boss, this same principle applies, except you determine your own salary. The answer to the question, ‘What can my salary be?’ is that you can only earn a salary if your farming business generates a profit. The amount of the salary is determined by the amount of profit made.
You must live according to the salary you receive and should not spend more than you earn. Spending more than your income will force you to borrow money and borrowed money needs to be paid back at some time. When you cannot pay back what you borrowed, you can end up losing everything you have – and become insolvent or bankrupt.
FINANCIAL MANAGEMENT IS CRUCIAL
Can your farm afford you? Most will say, ‘Yes my farm can afford me’. But is this the case? To be able to earn a salary your farm must be able to pay all farming expenses plus your salary. To establish the profit a business generates is important and can only be done accurately when applying proper financial management.
The correct way to manage the finances of your farm is first of all to compile a plan for every year ahead. Express this plan in rands and cents which will then be the budget for the new year. You can then allocate yourself a ‘salary’ to be paid every month based on the budgeted profit. Then live by that salary.
The best way to manage your own salary is also to compile a monthly budget for yourself and spend your income according to your plan/budget as if you were working for somebody else earning a fixed salary.
At the end of the year you can compile the necessary financial statements and determine the actual profit your farming operation has made. Should the profit (after the inclusion of the salary you have already drawn) be more than you have planned, you can decide what to do with the extra profit. It is highly advisable to use this to build a reserve fund to expand/improve your business. Following this route puts you in control of your business.
Use separate bank accounts for the purpose of managing the finances of your business and your own personal finances. If you prefer not to use two bank accounts, it becomes more challenging to keep accurate records of the expenses of your farm and your own income.
Unfortunately, instead of paying themselves a salary and living according to the salary, many farmers use products of the farm – milk, eggs, meat and vegetables – for own consumption instead of treating it as an income for the farm and an expense for themselves. Or when selling products on farm they use cash generated on farm, for their own expenses instead of recording these transactions properly. Cash for personal expenses is then drawn from the business bank account whenever needed. All this is done without proper record-keeping as long as there is money in the bank. This is a dangerous route to follow because money in the bank is no indication of whether a farm is really making a profit and can afford your salary.
The moral of the story is that the finances of your farming operation needs to be managed properly in order to answer the question: ‘Can my farm afford me?’ Remember finances are the oil that keeps a business running smoothly.
Publication: October 2021