Making good money this year? What are you doing with it?

Farming risks are unusually high and unusually prudent financing is needed to protect your business and way of life’.
Issue date : 29 August 2008

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I took a year off from farming many years ago and went back to university to tackle an MBA. Today it’s common, but back then it was a pretty new qualification in SA. It was reputed to be a tough course, with a heavy mathematics component – a subject I’d only just scraped through in matric. I was extremely nervous, especially as the dear old lady who was my vocation guidance counsellor at school had told me that I should never consider going into business.

The psychometric tests I’d done had proven beyond a shadow of a doubt that I had not the slightest clue about commerce. I nevertheless gathered my courage, applied, and to my great surprise, was accepted. It was a great year. Obviously I learnt about business and the many techniques used to assist managers in making good decisions, but the most important thing I learnt was that you should never trust unqualified old ladies who conduct vocation guidance tests.

I also learnt that chartered accountants and engineers don’t have all the answers and that the amount of business jargon they use is usually inversely proportional to their understanding of the subject. When I got back to my job, my boss was expecting pearls of newfound wisdom to drop from my lips. He was sadly disappointed. However, I revelled in having learnt the power of borrowing money, more elegantly called “financial gearing”. “Gearing” refers to the comparison between the level of a company’s borrowings and the equity or shareholders’ interests.

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Textbooks will tell you that there’s no correct figure. It depends on the industry and company, but if the gearing figure is 60%, it’s generally regarded as high. Less than 20% is considered low. Using the elegant calculations I’d learnt, I tried to talk my boss into borrowing a bit more for those extra tractors we needed, but he’d have none of it. In his mind it was quite simple: if you were able to borrow money and use it to earn more than it cost you, it was good business.

If not, leave it well enough alone. A nd, as he’d learnt from many years of experience and I only discovered later, that while you can be absolutely certain about the cost of the debt, as a farmer you’ll seldom, if ever, be sure about the money the debt will make for you. For the first time in many years farmers are having a good time of it. Food prices are high and while costs are catching up fast, profits are being made. I don’t know what your gearing is and frankly it doesn’t really matter, but I do know that in the present circumstances, your very first priority with any spare cash is to pay off your debts.

Your second priority, and you may disagree with this, is to build up a reserve of at least one year’s operating cost. Let’s explain that again – you need to be aiming to have sufficient cash available to cover a full season’s farming expenses. Does this seem excessive? It may be, but I’ll tell you something – you’ll sleep much better. F arming risks are unusually high and unusually prudent financing is needed to protect your business and way of life. Just do it. – Peter Hughes ([email protected] or (013) 745 7303). |fw