Essential accounting concepts every farmer should know

Cobus du Plessis explores fundamental financial principles that every farmer should understand, including the differences between assets and liabilities, income and expenses, and fixed and variable costs. He also looks at cash flow management, tax basics, risk management, budgeting, and managing unforeseen costs.

- Cobus du Plessis

Farming is not just about planting and harvesting or raising livestock; it’s also about managing finances effectively. Many farmers focus on production but underestimate the importance of sound financial management. Yet, financial stability is essential to ensure a farm’s longterm profitability and sustainability.

FINANCIAL LITERACY IN FARMING

Financial literacy is the ability to understand and use financial skills like budgeting, investing, and risk management. Without financial literacy, even the most productive farms can struggle with debt, poor cash flow, and unsustainable practices.

• Farmers who implement sound financial management practices can:

• Reduce debt and improve creditworthiness;

• Maximise profit margins through cost control;

• Make informed decisions regarding expansion and investment;

• Ensure compliance with tax regulations and avoid legal penalties;

• Maintain a steady and predictable cash flow to ensure business continuity; and

• Improve their ability to secure loans and funding for growth.

UNDERSTANDING FARM WEALTH

• A farmer’s assets are everything they own that has an economic value. This includes:

• Current assets – Cash, livestock, harvested crops, accounts receivable;

• Fixed assets – Land, buildings, machinery, irrigation systems; and

• Intangible assets – Patents, water rights, goodwill, brand reputation.

• Liabilities, on the other hand, represent the farmer’s debts and financial obligations. These include:

• Short-term liabilities – Supplier credit, bank overdrafts, loans due within a year; and

• Long-term liabilities – Mortgages, equipment loans, other extended obligations.