Farm records may begin as a compliance requirement, but their real value lies in helping farmers understand cash flow, profitability and how their businesses are performing.
By Maile Matsimela, digital editor at African Farming
For many farmers, record-keeping starts as a legal obligation, since financial statements, invoices and other business records are necessary for tax purposes. Compliance is only the starting point, however, according to livestock management specialists Herdscape.
When properly organised and analysed, the same records can help protect cash flow, improve profitability and provide the information needed to make better business decisions.
The advice below is based on technical information and guidance provided by Herdscape.
The information farmers need to understand their businesses falls broadly into two management areas: cash flow and profitability. Although closely connected, they measure different aspects of business performance and should not be confused.
Also read: How to turn your farm records into profitable business decisions
Cash flow tells you whether your business can last
Cash flow shows how money moves into and out of the farming business. A cash-flow budget or projection allows a farmer to estimate whether enough cash will be available to meet financial obligations in the months ahead.
A farming enterprise may appear healthy from a cash-flow perspective while still being unprofitable. A farmer could produce for an entire year, sell everything produced, and still discover that the business made a loss. In this situation, money is flowing through the business, but the underlying business model is not generating a profit.
The opposite is also possible. A farm could produce throughout the year and sell nothing during that period, yet still show a profit on paper. The business model may be sound, but without sufficient cash flow, the farm may struggle to meet its immediate financial obligations.
For this reason, a farming business must both work and last. Profitability shows whether the enterprise is working, and cash flow determines whether it can continue operating.
Also read: Five performance indicators every livestock farmer should track
Records are more than paperwork
Understanding the difference between cash flow and profitability requires more than financial statements and invoices. Farmers also need production, input, livestock, sales and asset records.
Many of these records are already kept for tax purposes. The opportunity is to organise them so that the same information used for compliance can also support day-to-day farm management.
A spreadsheet or basic bookkeeping system can be used to analyse this information without introducing unnecessary complexity. Herdscape notes that most banks can also provide account records in formats compatible with spreadsheets, making it easier for farmers to organise and analyse financial information.
Also read: This is what our best farmers do differently
Profit can mean different things
Herdscape distinguishes between accounting profit and economic profit.
Accounting profit is the figure used for financial statements and tax reporting. Economic profit goes further by considering opportunity costs, such as the value of the farmer’s time or the return that invested capital could have earned elsewhere.
Economic profit is particularly useful for internal decision-making because it helps farmers compare alternatives and determine whether their resources are being used in the best possible way.
Importantly, these insights do not require farmers to create entirely new sets of records. Instead, the information comes from the same core records already generated by the farming business.
Also read: Why record-keeping pays off
Turning records into management information
Once records have been analysed, they can reveal far more than the state of the bank account.
Farmers can use this information to understand how different parts of the business perform, identify which enterprises create value, determine which are most profitable, and understand what is driving profitability – or a lack of it.
This changes the role of record-keeping. Instead of collecting information mainly to satisfy legal and tax requirements, farm records become a tool that helps farmers understand how their businesses are performing and make better-informed management decisions.
Source: This article is based on technical information and guidance provided by Herdscape. For more information on regenerative grazing, livestock management and Herdscape’s training programmes, visit Herdscape or contact them at frontdesk@herdscape.co.za or 083 781 3441.
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