Saving a portion of one’s income has long been acknowledged as crucial to wealth creation. But saving like this is seen as something done by individuals, rather than by businesses. “It’s prudent for the ‘man in the street’ to keep some of his money in the bank rather than spend it. But how often is this philosophy impressed upon businesses or farming operations?” asks Jan van Zyl, FNB head of agriculture information and marketing.
Saving a percentage of profits is important, he stresses, as this can determine the financial survival of a farming operation and shield the business from risk during periods of uncertainty. ‘Risk’ is an event that can lead to financial loss. Agricultural risks have their origins in natural, social and economic factors. If a farming risk has been taken and does not pay off, a financial crisis can set in before the next crop is harvested. It is then, when cash flow dries up and responsibilities cannot be met, that cash reserves could help a struggling farmer through the dip.
Generally, there are three approaches to risk management: risk avoidance, relieving the effects of risk, and relocating risk. To avoid all agricultural risk would amount to not farming at all and there would be no need to encourage saving. “To relieve the negative effects of risk is to identify and manage those risks in order to minimise their results, should things go wrong. Having a mixed farming enterprise would, for example, partially negate the risk of drought or disease,” says Van Zyl. “The relocation of risk is an umbrella term for actions such as insurance, term contracts and other instances where another party would take on the risk in return for remuneration.”
Where should savings come into play? Savings form part of the farm’s balance sheet as reserves vital for sustained financial well-being. It is estimated that about 50% of SA grain farmers do not make use of production credit, something which can be ascribed to the accumulation of savings over a number of years. Without an interest factor in their production costs, these farmers have a competitive edge.
“Reserves are also essential for investment either for expansion or the general upkeep of the enterprise. Without a cash reserve at hand, a farm will perform poorly in the longer term due to diminishing margins resulting from comparatively poor economies of scale. Modern farmers also know the importance of acquiring new technologies, without which the farm will be uncompetitive,” says Van Zyl.
But the greatest asset of cash in the bank is the assurance it provides that financial commitments can be met in the short term in the event of farm income suffering a setback, he adds.