Watch your cash and survive
At the time of writing this article it is already clear that economically South Africa is in for another rough ride during 2020 which will have its effect on our farmers, especially our smaller farmers.
Many farmers are still experiencing financial difficulties caused by the drought and the negative economic environment of last year. Fortunately, the expectations in most areas are of good crops and an income which will relieve the pressure on the cashflow of our farmers.
However, we must learn from the difficulties caused by the abovementioned circumstance from last year and which some farmers are still experiencing. South Africa is a dry country and will remain as such. The long-term average rainfall for South Africa is plus minus 464 mm per year. Compare this to the long-term global average of about 860 mm. Climate change could well affect these figures and all expectations are that South Africa will become hotter and drier with more severe storms and more regular and intense periods of droughts.
Thus, what must I as farmer do to survive? Up your management of your cashflow, as one of the areas of financial management to manage. This will be part of the challenge to our farmers – see it as an exciting and fulfilling challenge.
To manage your cashflow you must compile a cashflow budget for the next/new financial year. Without this statement it is just impossible to manage your cashflow. As the name indicates it is a cashflow statement, therefore only when cash is received or paid into your bank account and only when cash is spent or paid out from your bank account the transactions must be recorded. In practical terms, if you are uncertain or have never compiled a cashflow statement start compiling one now by recording your present cash-inflows and cash-outflows. This actual statement will then assist a great deal to compile a cashflow budget for your next financial year. There is no prescribed formal way to compile a cashflow statement, an example of a cashflow statement was provided in a previous article. The accounting period is divided into individual months to reflect your cashflow on a monthly basis.
Because cashflow is an important consideration when it comes to financing your farm business, the monthly bank balance is an important element of the cashflow statement. When incorporating the correct bank balance, it results in a side-line benefit, it forces you to check (control) your bank statements on a regular basis.
The cashflow budget facilitates the planning and control of the cash of your business. The purpose being to identify future cash shortages and cash surpluses, thus providing you with information to manage your cashflow – remember if you do not measure you cannot manage. The cashflow budget therefore serves as a basis to determine the cash needs of your business and indicates when you will need additional cash or bridging finance as it is also referred to.
A cashflow statement also provides useful information and explanations of sources of income you receive and when it is received in a cash form. Useful information and explanations regarding expenditures is also available from the statement. It answers the utmost important question about whether there will be enough cash to cover expenses when they are due.
When cash shortages are projected you will have to plan how to overcome these shortages. Certain expenses must legally be paid when they are due such as salaries. You might have seen or heard news reports during the last few months of companies such as Denel who could not pay their employees at the end of a month. Did you note the uproar it caused? You surely do not want something like this to happen with your business. It was also extensively reported that the root cause of the problems of for instance Eskom and SAA is cashflow problems – shortages of cash to be exact.
Just a reminder – should you claim your business to be successful, it must be successful in three areas. The financial position as shown in a balance sheet must be positive, indicating that you have at least twice as much assets than liabilities. Secondly you must make a profit – income must be more than expenditures as calculated per income statement. Thirdly you must have enough cash available as shown by your cashflow statement with a cashflow ratio of 120%.
Cashflow has always been important but has been neglected by many managers. The many changes in the agricultural environment such as climate change, mechanisation, digital advancements, the pressure from consumers for healthy food produced safely, and other changes will eventually force our farm managers to manage their cashflow properly. Do not be fool-hardy. Heed the lessons regarding cash management and start applying it immediately.
Watch your cash and manage your cash according to your cashflow budget if you wish to survive as a farmer.
Publication: August 2020