Face the financial woes of South Africa
The motivation for this article was inspired by an article by Andries Wiese – ‘how SA’s financial woes affect your business,’ published in the Farmer’s Weekly of 29 November 2019. The woes addressed were currency devaluation, sovereign credit downgrades, investor confidence and capital outflows. One could also add the low growth rate or GDP as a woe.
It is almost a year later, and the predictions in the article have come true. The rand has devaluated meaning the value of the rand has decreased resulting in higher prices for imported products, such as several of our farming inputs. South Africa has been downgraded to so-called junk status. This means investors worldwide see South Africa as a risk to invest money in. This affects confidence of investors, locally and foreigners, in South Africa negatively because investors are not sure of a good return on investment and even if they will get their money back.
At the beginning of the year it was also announced that South Africa is in a recession because the Gross Domestic Production is negative. In comparison to a business this means the country is not making a profit – income is lower than expenditures. Therefore, more money needs to be borrowed to pay for all government expenses such as salaries. For a business this will be an indication of poor management.
Moreover, we have also been hit by the corona virus pandemic and the resulting lockdown. Apart from the challenges posed by the lockdown, as discussed in a previous article (Pula Imvula September 2020) and the woes indicated in the previous paragraph, a very gloomy picture of terrible corruption regarding corona virus relief funds are unfolding. The corruption affects the already negative view of South Africa as far as investment is concerned.
These are a few terrible curved balls thrown at our farmers, big or small. Regarding the management of your farming business you can either face these balls or duck. The challenge being these curved balls are all beyond the control of any farmer, they are external factors.
In practical terms, the effects of these woes on a farm are briefly that imported inputs such as fuel, chemicals, fertilisers and machinery has become more expensive, borrowed funds became more expensive and, funds to invest into your business became scarce. On the other hand, it is also true that a devaluation of the rand presents an opportunity for exporting goods if possible.
Let us be positive and prepare to face these curved balls and explore the opportunities they represent. One can at least protect your wickets instead of being bowled out. We cannot underestimate the risks involved when faced with these financial realities, but they can be a wake-up call. It will be worthwhile to face these curved balls to remain a sustainable farmer. People must eat.
ENSURE MEASURES ARE IN PLACE
To face these curved balls put on your gloves and helmet and take up your bat:
- See to it that you have a proper record-keeping system to be able to evaluate the financial aspects of your farm properly. Applying the principles of precision farming will be helpful to ensure better records and provide improved information.
- Manage your cash-flow diligently by applying your cash-flow budget especially as far as purchases are concerned. Be very aware of buying at the spur of the moment especially with reference to more expensive capital items (machinery, implements). A special is not always a special. Without a proper cash-flow statement you will not be able to manage your cash-flow properly.
- Control your private or household expenses – it is very helpful and advisable to have a separate budget for these expenses. Do not live beyond your financial means.
- Manage the costs of your inputs by means of a farm business plan and take steps to reduce the costs. With a proper income statement, it is possible. Ensure that you use the correct quantity of inputs as advised and/or as planned.
- Evaluate the financial position of your farming business thoroughly. Use your balance sheet and have a good look at your liabilities. Debt is not your friend and too much debt has been the downfall of many a farmer. At present interest rates are low due to the pandemic, but refrain from seeing this as an opportunity to borrow more money. The rates will increase again in future. Should you really need to borrow money, negotiate the lowest possible interest rate.
- Evaluate your production methods. Farm with nature and improve the health of your soils. Apply the principles of conservation farming, this will assist in reducing your production costs.
- Most important – do you have a proper business plan?
Some of the measures mentioned have been discussed in previous articles from different angles but the repetition only emphasises the utmost importance of these measures. Do remember that assistance to re-evaluate your business is available. Make use of the expertise available from agricultural businesses and institutions such as Grain SA.
Publication: December 2020