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Recognise the signs of BANKRUPTCY

December 2016

Bankruptcy refers to the position where the farming business has more liabilities than assets and is not able to fulfil all obligations. Looming bankruptcy does not happen overnight. It is a slow process and takes quite a while (most of the time at least more than a year) before the farming business is declared bankrupt or the technical correct word insolvent.

This leads to the question ‘Why are there farmers, in a middle of a crisis (for instance the present drought), who are able to farm successfully and meet all their obligations?’ This can be debated endlessly. However, finally all reasons can be relayed to the quality of management, and in the case of a farming business – farm management as was confirmed by a number of studies to this affect.

Numerous definitions for Farm Management exist but by combining all definitions they all more or less state that farm management is‘THE EFFICIENT EMPLOYMENT OR COMBINATION OF ALL RESOURDES, HUMAN AND PHYSICAL, TO ACHIEVE THE AIMS OF THE FARMING BUSINESS.’ Therefore the physical resource base of a farm is not a recipe for success or failure. Instead performance is determined by the way the farm is managed to use the resources efficiently.

In practise management means to plan, organise, implement and control all management areas properly. The management areas being production-, marketing-, purchasing, financial, administrative-, human resource, public relations, asset and stock, and general management. Thus the farmer must be a champion manager. The champion farmer will then be able to employ his employees, his land and all immovable assets and all movable assets efficiently to produce quality products customers need, at a profit.

At the same time, whilst applying each of the management tasks – planning, organising, implementing and controlling – the champion farmer/manager will be the good leader, who can take decisions, communicate internally and externally, delegate work, co-ordinate sections, motivate his people and maintain discipline both informally and formally.

Conduct of managers which suggest poor management and which can affect the success of a farm are for instance:

  • Slackness or lack of discipline – as managers, some farmers know what they are supposed to do, but are simply to slack and cannot discipline themselves to apply the correct management principles.
  • Timeousness – some farmers apply correct management methods, but always run a day or a week behind their activities. They either plant a week to late, treat a sick cow a day to late, or fix their grain prices too late.
  • Standard of living – homes and private cars are unproductive assets and therefore those costs form part of the farmer's management remuneration. The higher the cost, the more pressure on the profit of the business.
  • Keeping records – farming is often practised without proper information. Some farmers think their farms generate a lot of money but proper record-keeping may probably indicate that for instance self-produced maize is not ‘free’.
  • Adaptability – some farmers are not sufficiently diversified to adapt to changing market or climate conditions.
  • Stagnation – some farmers get stuck in obsolete management practises outdated by a decade, and fail to realise that new technology and improved practises have been developed since.

Signs of bankruptcy
As stated in the first paragraph becoming bankrupt is a gradual process of which the following are signs that bankruptcy might be on its way

  • Creditors continually pressurising and threat ening a farmer for payments.
  • Loan balance continues to increase.
  • Extending the repayment terms. For example, no deposit or a very small one over a repayment period that is as long as possible.
  • Repayments are made late, with only the minimum required amount being paid.
  • Rescheduling loan payments for a later date.
  • Inability to pay VAT if applicable.
  • Selling loose assets privately for cash to pay private expenses.
  • Borrowing money from friends or family without set repayment arrangements.
  • Purposefully making errors on cheques to win time for a second cheque.
  • Many queries on the accuracy of amounts on account statements or requests for duplicate invoices.
  • The excuse that the payment is in the post.
  • Circulating rumours about the farmer's financial position.
  • The farmer becoming aggressive or elusive when talking about money.
  • Refusing to speak to creditors, an excuse of always being in meetings, never returning calls or referring the matter to somebody else as the accountant or office assistant.

When these actions occur it is time to thoroughly analyse your financial situation. If you are not making a profit, a concerted effort should be made to increase income, decrease expenses and/or restructure debt. If this is not possible, unproductive assets must be sold or an alternative agreement must be made with creditors. If these options do not offer a reasonable chance for financial survival, sequestration might be an unavoidable consequence.

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

Publication: December 2016

Section: Pula/Imvula