Importance Of Financial Side Of Farming

Press, Volume CVI, Issue 31119, 23 July 1966, Page 9

Importance Of Financial Side Of Farming

The importance of financial organisation in farming was strongly emphasised by Professor J. D. Stewart, professor of farm management at Lincoln College, speaking to the Wairarapa farmers’ conference earlier this month. On many farms he said that it was crucial.

“I think it would be fair to say that most farmers 'play it by ear’,” said Professor Stewart. “They rely on intuition and financial horse sense to see them through, and

really it is rather remarkable how successful this often is. But it is by no means universally successful, and it is my earnest view that with the increasing size and complex-

ity of farm financial transactions more rigorous methods of financial control will have to be more widely adopted in the industry. For some time I have felt that the next major step forward in farm management in New Zealand must be in this field. “In the first place the essential basis of efficient financial management in any business is a high standard of accounting. It is i now becoming widely recognised, largely as a result of pressures from farm management advisers, that a minimum set of accounts for taxation purposes is entirely inadequate for management purposes.

this checking ideally should be monthly, although even bi-monthly or quarterly analysis is valuable. “We have some farmers who work closely to this system, where the budget itself is laid out on a monthly basis. They find that this gives them very firm control over their finances, both farm and household, and that they are able to make clear-headed decisions throughout the year in response to the unfolding financial picture. “This job may seem to many to be tedious and unattractive. My answer to this is that for many it would be time productively spent. Assistance in preparing the budgets and the estimate of cash flow throughout the year can be obtained from farm advisers and accountants. Stock firm security supervisors are increasingly doing this sort of exercise for clients with high indebtedness. “However the most Important advance in this work will undoubtedly result from the increasing availability and power of electronic computers. “During the last year, In collaboration with the department of accountancy at Canterbury University, we have been exploring the possibility of using a computerbased system of monthly accounting control on farms. We have had nine farms in the pilot scheme, and the results have been sufficiently encouraging to persuade us to enlarge next year’s sample to about 80 farms.

"Farmers who need better accounts to assist them in understanding and planning their business should now request their accountants to provide them. They must, of course, be prepared to pay for them, and should not quibble at this, since it will be productive expenditure. “In particular all farmers should be insisting on a cash flow statement, where the source and amounts of all cash flowing into the business are detailed and the destination of all cash flowing out. No progressive industrial or commercial organisation would contemplate trying to run its business without such an analysis. Neither should a well-run farm. Budgets “A set of financial accounts is, however, history. It can therefore contribute to future management of the farm only when used as a basis for forward planning. So the next step in sound financial management is budgeting. . . An increasing proportion of the farming community recognise it as a valuable, in many cases, an indispensible tool for sound farm management. “The need for forward financial planning is most acute when the farm is in a dynamic, rather than a static state, and where the cash resources are not unlimited. It is crucial under a development programme to ensure that funds are going to be available at strategic points in time to ensure that the programme is to remain in balance. . . Also sufficient flexibility must be included in the financial planning to meet the problems of uncertainty always inherent in these plans. “I could cite many cases where lack of financial planning and control has led to gross inefficiencies in development programmes, and many where careful planning has avoided imminent difficulties.

“The objective is to provide co-operating farmers with up-to-date financial analysis month by month, with budget comparison, an interim balance if required for taxation planning, and an immediate analysis of financial performance at the end of the twelfth month, on which to base the succeeding year’s programme and budget. The farmer, for his part, will have to record on specially coded sheets his monthly transactions. The computer does the rest—although of course it does not do anything which cannot be done manually—it does It swiftly, accurately and systematically. “Many of you will think that we are way up In our ivory towers in imagining that computerised analysis of this kind can have widespread application in the farming industry. You may be right. I am making no extravagant predictions. All I can say is that it represents, in my view, the best prospect for getting the financial organisation of farms on to a business-like basis.

“The ultimate step in farm financial planning is systematic checking and control throughout the financial year. This would involve regular comparison of cumulative income and expenditure against budget Since calendar months are the customary time-units of financial returns,

“And while financial organisation is by no means the only component of successful farm management it is an extremely important component, indeed on many farms it is crucial,” said Professor Stewart