FINANCES
be cut without detriment to pro-
duction? - put out on tender,
negotiate discount, etcetera.
b. revisit fixed/overhead production
expenses (e.g. human resources -
evaluate productivity, asset
insurance - comprehensive
versus essential accounting fees
- renegotiate or put out on tender,
maintenance of total vehicle fleet,
etcetera).
c. investigate desirability of the out
sourcing of certain activities which
require extensive capital invest-
ment.
d. investigate whether rental amounts
are realistic and renegotiate where
necessary.
e. implement a proper record-kee-
ping system for effective cost
control.
iv.
Bring about a lower risk profile by
considering the following, inter
alia:
component holds for a predomi-
nantly crop farming business, was
proved once again over the past
few seasons.
a. obtain access to economies of
scale by investigating possibility of
co-operation agreements.
b. build up capital reserves to stabi-
lise cash flow during difficult
years - make principle decision to
invest a portion of profits in liquid
assets - e.g. money market, fixed
deposits, taking up of flexi-bond
reserves.
c. diversification, whether by means
of combination of business units
and/or geographically - bear
management capacity in mind
- no more than four business
components is set as general
guideline. The value which a beef
d. contract cultivation (production
or pre-season contracts) with
reliable and well-established
off-takers for at least a portion of
total production - guarantees
market access and information,
production credit, minimum or
guaranteed price.
e. investigate low risk marketing/
grain price strategy, e.g. minimum
price contract (MM) = guaranteed
floor price, deferred price con-
tract, basis price contract.
Gradual contracting as harvest
certainty is confirmed - 1/3, 1/3,
1/3 or ¼,¼,¼,¼. Strive towards
realisation of a good average
price over time.
f. where essential replacement of
expensive capital equipment has
to be done, consider acquisition
of good second-hand equipment
backed by the necessary guaran-
tees. Guard against tax tempta-
tions - remember, you still have to
pay an annual premium!
g. calculate required break-even
turnover as well as weighted
probable maximum debt burden
which can be serviced by current
farming unit. Plan composition of
income and utilisation of foreign
capital accordingly.
h. future capital expansion - make
sure that current farming units
are already functioning at opti
mum production level (maximum
profit) before any expansion is
considered. If justified, the loan
amount in the case of land acqui-
sitions should not be more than
70% – 80% of the productive
value.
Senwes Agri-Economic Services'
E-Bureau analyses indicate clear-
ly that a number of farming
businesses have the opportunity
to improve financial performance
by increasing operational effi-
ciency.
i. business structure of the
farming enterprise - make sure
that the business is being ope-
rated in the correct legal entity
in order to minimise the potential
impact of donation, capital gains
and estate tax on the sustaina-
bility of the enterprise. The point
of departure should be to keep
the owner's personal estate as
small as possible.
In conclusion - irrespective of the option(s)
being considered, it is of the utmost impor-
tance to test the potential impact of the
effect which it could have on the enter-
prise on the basis of an extensive viability
study. Guard against impulsive decisions.
Senwes Agri-Economic Services can assist
you with such an investigation.
For any enquiries, contact:
Johan du Toit, Manager:
Senwes AES
018 464 7543
* This article is a follow-up on the first part which
appeared in the August-September 2018 edition
of Senwes Scenario.
SENWES SCENARIO | SUMMER 2018
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