Financial literacy – what you need to know

Business performance is measured with accounting scorecards. If you don’t understand them, give up all hope of ever becoming a great manager.

I became a farmer because of tea parties. When I was a child, my parents would pile us into the family Chev and drive out of town to have tea with a local farmer. After greetings and some home-made ginger beer, we children would head for the farm shed.

It was always a magical place, with its ploughs, mowers, hay rakes, half-dismantled engines and – holy of holies – tractors.

I remember walking with my father and a farmer on the rich soil of one of the latter’s recently ploughed lands. I was about four at the time. As I write, I can still smell that special, fresh, earthy aroma. It was a beautiful afternoon, and that day – for all the wrong reasons – I decided to become a farmer.

Farming vs the business of farming
I went on to study agriculture, and got along fine in my first farm job. After all, I understood crop production, how to raise beef and chickens, and produce milk – all in theory. I had a few tough practical lessons to learn, like how to set a plough, survey a contour and weld a broken implement. But I got by, and never doubted that this was the life for me.

As time went by, I became drawn into the commercial end of the business. This was truly foreign territory. I understood words such as ‘income’, ‘expenditure’ and ‘profit’, but when I heard my boss talking about ‘depreciation’, and the bookkeeper saying that it had to be added back to profit in order to calculate cash flow, I was mystified.

When ‘accrue’, ‘amortisation’, ‘current ratio’ and ‘headline earnings’ entered the discussion, I started to panic. I had landed on Planet Accountancy, where they really do speak a different language! With agriculture I at least had a patchy knowledge of what was required; with finances, I was simply illiterate.

Learning the ropes
Yet, whether we like it or not, accounts are the scorecards of business. If I didn’t understand the score, or how it was measured, how was I ever going to make a success of my farming career?

My vision of farming was a world of fresh moist soil, gamboling newborn lambs and thriving mealie plants. But the harsh reality was that I needed to know how to do an operating and capital budget, how to calculate cash flow, what depreciation meant, and what opportunity and marginal costs were.

So off I went on a financial literacy course, and learnt about the three main scorecards of accountancy:

Income statement
This sounds as if it measures only income, but it actually measures costs as well. I was relieved to hear that this was the old ‘profit and loss account’, which I’d heard about before. I learnt that this scorecard reports on the performance of the business over time – usually a year, but sometimes more often.

A further revelation was that while it might show a good profit, a business could actually be on the brink of collapse. A profitable business collapsing? Talk about confusing!

Balance sheet
This can be considered a snapshot of a particular point in time. If you put a sequence of balance sheets together, each provides a solitary image that has some value, rather like a series of photographs of a person growing up. But it’s the comparison between them that really tells the story of the changes taking place.

Cash flow statement
This is extracted from both the income statement and the balance sheet, and it tells you whether the business is likely to survive or not. It is by far the most important of the three scorecards, and the one I was told to pay most attention to.

Those are the basics. Please join me on my journey towards financial literacy next time!

Share
Published by

Recent Posts

  • Featured Home Image
  • Managing for Profit

Yield and quality determine profits, nothing else!

Costs under your control such as yield and product quality are what determine farming success. Don’t waste time on costs…

5 hours ago
  • Caxton
  • South Africa
  • Use only text

Mixed reaction expected from agri sector to repo rate reduction

The decision by the South African Reserve Bank Monetary Policy Committee to lower the repo rate to 6,5%, down from…

23 hours ago
  • Recipes

Carrot cake loaf with dates

This carrot cake loaf, with its delicious, zesty cream-cheese icing and chopped walnuts, is soft and full of flavours.

24 hours ago
  • Caxton
  • South Africa
  • Use only text

Jobs and safety to take centre stage in the Western Cape

Western Cape Premier, Alan Winde, delivered his maiden State of the Province address on Thursday, focusing on job creation and…

1 day ago
  • Caxton
  • Use only text
  • World

Australian table grape exports reach half-a-billion mark

As the Australian grape export season nears an end, it is estimated that volumes amounting to half a billion Australian…

1 day ago
  • Featured Home Image
  • How to Crop

Fertilisation: basic principles that every farmer should know

Achieving optimal yields is greatly dependent on providing crops with the right nutrition at the right time. Understanding the role…

1 day ago