Production is largely a technical process. If you copy the practices of the best farmers and keep abreast of advances in technology, chances are you will also be a good producer. However, there are a number of questions you must ponder before you get started. They include the following:
- What kind of farm do you want to start?
- What do you know about growing those crops or raising that type of livestock?
- What is the production cycle?
- What are the key management factors in producing high-quality results?
- How is production success measured against the performance of other farmers in the industry?
- What level of technology should you use?
- What government programmes provide assistance to farmers in this type of venture?
Nothing takes the place of a real, practical experience. If you have no experience in the type of farming you wish to undertake, spend some time with someone already doing it. Farmers are always willing to share their experiences with someone who is keen to learn from them. Find one who can share some management secrets with you. Even if you must volunteer your time, it is well worth the investment. Many financial institutions will not consider your loan application seriously if you cannot demonstrate some practical knowledge. You can also learn a lot from talking to successful farmers and asking extension officers questions.
If a group of farmers were to asked what task they dislike the most, many of them would probably say: “Doing the bookkeeping!” Unfortunately, you will not find any advice here that will make this chore fun, but it is absolutely essential in ensuring your success in business. Many small business people keep only enough information to satisfy themselves. This practice completely ignores the value of good, timely financial and production records in farm management. How will you know that feed expenses are rising higher than they should be? How will you know if you can afford to buy that new tractor? How will you know if you are making money? Using a record keeping system designed for your business will help you to identify problems and solve them before they become unmanageable. These systems do not have to be complicated or expensive – in fact, a notebook with different pages for each of your income and expense accounts, may be all you need. More likely, however, you will want to have a system that also keeps track of your production assets, liabilities and ownership investment. There are many bookkeeping/ accounting software packages on the market that make this task easier and allow you to receive the management reports needed to make good decisions. Do not hesitate to ask for help from an accountant or bookkeeper, especially as you set up your system. They can give you advice that can save you time and money in the long run. Do not fret. You should consider this an investment in the business, which is every bit as important as that new cow shed or tractor.
Farming is a business with plenty of uncertainties and unknowns. How will the weather affect the crops? What will the interest rates be next year? Will the prices of my product be higher or lower than last year? Despite these questions and regardless of the size of your farm, budgeting is an important tool in successfully managing the business. Most businesses have a five-year budget to plan long-term expenditure on equipment, land and buildings. The first year is very detailed and is used to control expenditure and identify financing requirements. But you have more important questions to answer before getting into farming. Can you afford to buy or start a farm? How much money will you need to borrow for the farm and the first few years of operation? What size farm do you need to provide the income you wish to have? The most honest answer right now to these and many other questions is: “I don’t know!” It is necessary to develop projected financial statements. They include balance sheets, cash flows and income and expense statements. Depending on the type of farm business you plan to have, the projections should be five or more years into the future. For example, an apple farm starting from scratch requires statements for eight to 10 years since it takes four to five years before a new orchard starts producing.
A Balance Sheet is a summary of what your business owns (assets) and how those items were financed (liabilities and equity). It is ‘balanced’ because assets = liabilities + equity The first balance sheet you prepare should represent your financial state on the first day of business. At the end of each projected year of business, another balance sheet should be prepared based on the cash flow and income statements of each of those periods.
Cash Flow Statement
The cash flow statement is simply a projection of the timing and amount of cash flowing into the business from all sources, including loans, sales, government grants and owner’s contributions, and the timing and amount of cash flowing out of the business in operating expenses, capital purchases, loan payments and withdrawals for living costs. These statements are prepared for each year divided into weekly, monthly (most common) or quarterly periods. Many farmers will project cash flow out to five years. These projections are necessary to determine if sufficient cash will be generated and available from the business to cover expenditure. The time and amount of cash deficits can thus be measured and you can then negotiate an operating line of credit at the bank or other lending institution well ahead of time. The cash flow also provides information on cash balance, operating loan and equity adjustments for the balance sheets.
Income and Expense Statement
The final statement needed to complete the trio of financial records used to project the business into the future is the Income and Expense Statement (more commonly called the Income Statement). It provides an estimate of the net income for each year of the business. Although many of the items in this statement are included in the cash flow, it is important to recognize that the calculation of net income includes some non-cash items, such as depreciation on buildings and equipment, and excludes some cash items, such as principal payments on loans, capital purchases and sales and owner’s withdrawals.
Simply preparing the series of statements is not enough. You need to analyse the results to ensure that you are within reasonable parameters in progress towards your goals. Once you are in business these same techniques are used to analyse past performance, too. The three most important areas for analysis are liquidity, solvency and profitability.