Saving is an essential financial discipline for all of us, perhaps a little more so, for farmers who want to be successful.
The older generation learned to save at an early age which is the right time to start with exercising the ability to apply financial control.
Most people today find it difficult to save, because there are so many demands on one’s money. The secret, says Michael Cordes agri-marketing expert, is to spread it around in such a way that you can meet these demands but still have some money left over to save.
This is often easier said than done. And when the demands on your finances are greater than the money you have available, the ‘savings account’ which is really any form of investment, or putting it into a safe place, is the first victim.
PAY YOURSELF FIRST
The first thing you should do after making the compulsory payments, like farm rent and paying back loans on capital purchases, is to put money into your ‘savings account’, says Mike.
“The reasoning is simple; if you don’t pay yourself first, you can’t be of any value to others,” he explains.
He recommends that when you are drawing up your budget you include an amount or savings using your monthly income as a guide. What you save every month depends on your total costs and your total income.
The decision to save will be one based on a percentage of the gross profit your business makes. Gross profit is the amount left over once total costs have been deducted from total income. Try to make the percentage of savings at least 10% of gross profit, says Mike.
Setting a target amount for savings is part of building financial discipline.
OPEN A FEW DIFFERENT ACCOUNTS
For small businesses, Mike recommends opening separate savings accounts for different purposes.
“Let’s say you have a number one account into which your income goes and from which your payments are made; you can then open a few key savings accounts at the same bank, each one for a specific purpose. These accounts could be for tax savings, compulsory payment savings, personal savings and reserve savings.”
Set up a routine, once a week or at whatever interval suits you, and go through your income and expenses to calculate whatever has to be paid. This is called – checking your cash flow.
If there are surplus funds transfer some into your personal savings and reserve fund savings accounts. Don’t transfer all the excess money because there must be enough in the account to cover whatever has not been paid.
There are times when the amount you can transfer will seem to small to bother saving, but do it anyway. You are still building up the account and you are practising the discipline Mike explains.
Monthly, weekly or daily, salaries and wages can be quite a challenge to the small-scale farmer, but they must be paid on time. A salaries and wages savings account gives the farmer a cushion against a bad month and takes the anxiety out of paying wages.
Mike suggests working out your total monthly labour bill and dividing it by four to get the weekly bill. “Try and transfer this amount every week. Even if you don’t have enough to transfer the whole amount, transfer what you can afford.”
At the end of the month, if you are short of money for your wages bill you can transfer the amount into your main account to pay salaries.
KEEP IT SIMPLE
Only personal savings and reserve savings are transferred from net profit. The other transfers are part of normal expenses.
Net profit is gross profit minus operating expenses and other expenses such as taxes and interest paid on debt. When you are running your own business financial discipline is critical, says Mike.
“This is a simple, practical way of controlling finances.”