Financial education for farmers

Everybody learns to manage money but not everybody manages it well.  Some live hand to mouth focused only on making ends meet on a day-to-day basis.  Others look ahead trying to prepare for unforeseen events or irregular demands such as school fees by setting some income aside as savings.  Entrepreneurs have to ensure they can purchase inputs and meet other business expenses from their incomes in addition to meeting family demands.  So learning to manage money well is an important skill.  It often involves changing behaviour, shifting from reactive to proactive decision-making and learning ways to plan, analyse and control household and business finances.  Limitations in literacy and numeracy, coupled with a lack of access to financial services, can make acquiring these skills difficult for small scale farmers in developing countries, but they are vitally important.

This series of booklets has been specifically designed for use with farmer discussion groups, study circles or field schools.  The idea is to promote a philosophy of “Talking about Money” as opposed to the traditional assumption that all small farmers need to improve their lives is credit. Taking a loan without understanding your cash flow, evaluating your risks and being able to monitor your progress is a recipe for failure in terms of money management.  A more holistic approach is needed particularly now that more and more financial service providers are reaching down to the low income market and new technology is creating unprecedented opportunities for rural communities to access financial services.

“Talking about Money” is about financial education; helping people to recognise the importance of regular saving and thoughtful expenditure; showing them how to calculate costs and profit margins and work out cash flow plans; ensuring that they understand the role and potential of financial service providers and the products they have on offer; and ensuring that they have the confidence to use these services and ask the right questions, for example, with regard to insurance, bank accounts or interest rates.

Each of these booklets has been written in a style which should enable agricultural field workers to use them without any special training (provided they are in a language which can be read by the user).  They are small enough to be carried in the field and are divided into short sections with questions or exercises at the end of each section to promote involvement and discussion.  Some activities can be carried out with non-literate participants but, in the end, you cannot go far with money management unless you can write numbers and make simple arithmetic calculations.  It is recommended that farmers are shown how to use simple calculators which can be bought cheaply and also will become increasingly available on mobile phones.

The figures used in the books are largely fictitious and should not be taken as representative of any particular currency at any given point in time.  The $ symbol is used simply as a generic money symbol.  If the book is being translated for a specific local context, the figures can be replaced with appropriate amounts in the local currency as long as the arithmetic remains simple.


TAM 1: Explaining Cash Flow and Savings

The emphasis in this first booklet is on savings and how essential it is for everyone to be able to set aside money for future use. Cash flow patterns, produced with or without numbers, are introduced as a vital tool for someone to take stock of their current situation and determine when and how much they could expect to save over the course of a typical year.  Even though borrowing may be used to overcome a shortage of current funds, this is simply advance use of future income and savings must be made from that future income to repay the loan.  

Step by step instructions for preparing a cash flow plan are included, together with various forms that may be used in the planning process. The emphasis is on helping people understand their current cash flow rather than planning a new business enterprise.  Copies of all the forms used in the booklet are available as downloadable word documents or excel spreadsheets, which can then be printed out in whatever numbers are required. 

The final section looks briefly at alternative methods of saving and the role of financial service providers.

TAM 2: Explaining Profitability and Borrowing

The aim of the second booklet is to help people to take stock of their current livelihood strategies and decide if they consider any of their enterprises as businesses from which they hope to make a financial profit.  Guidance is then provided on how to work out the profitability of both farm and non-farm enterprises. 

The importance of making a profit for business growth is explained and how you can work out the rate of return on the capital invested. This is then used to show how borrowing to expand a profitable enterprise in which the rate of return is greater than the interest paid is very positive for the owner.  The money he has available to invest will increase.  However, if a loss is made his capital can disappear very quickly.  Constructing a simple balance sheet can help people to assess the level of risk they are running when they borrow money.

The book concludes with a look at how to improve the profitability of enterprises and how to budget the potential profitability of a new enterprise.

TAM 3: Explaining the Finances of Machinery Ownership

Using machines and additional sources of power usually makes human labour more productive.  People can do more work at a faster rate.  So machinery can help farmers to increase the area they cultivate, thus producing more crops or livestock to sell. It can help them transport products to more distant markets and potentially sell things for a better price.  Machinery, however, is often expensive and it depreciates and needs replacing after some time. 

This booklet explains how farmers can calculate the costs associated with the ownership and use of draught animal power, tractors and other tools and machines.   It shows how they can assess the pros and cons of investing in new machinery using partial budgets and cash flows and introduces the ideas of opportunity cost and break-even point.  The fact that the cost per hectare of owning machinery and draught animals reduces as the area cultivated increases means that offering hire services is one way a farmer can improve his chances of covering his costs and repaying loans used to buy machinery.

The final chapter provides guidance on how to develop and operate a contract hire service and explores the concept of joint ownership as an alternative means of spreading the costs of machinery ownership.

TAM 4: Explaining Financial Record-Keeping

This book takes a pragmatic approach to financial record-keeping, explaining how important it is to have accurate information about transactions but offering a variety of simple approaches which farmers could use to help them keep track of their income and expenditure.  As a first step simply keeping the paperwork associated with financial transactions in a safe and organised manner is recommended.  This could be supplemented with notes made on a calendar or in a notebook.

If a farmer has prepared a cash flow plan as suggested in Book 1 of this series, one of the most useful things he can do is to compare his actual expenditure and receipts with those he included in his plan. This monitoring procedure is perhaps the best way for anyone to improve their money management.  Problems can be identified early and steps taken to avoid financial difficulties.

For those convinced of the merits of record-keeping, alternative cash book layouts are described and in the final chapter, the idea of using a bank account is introduced together with ways of incorporating bank transactions into a cash recording system.

TAM 5: Explaining How to Manage Risk

Anyone who chooses to invest in a business activity knows that the outcome of his or her enterprise is affected by risks.  Investment decisions always involve expectations about future prices, costs, yields and other factors, which may or may not come to fruition.  People vary in their ability to cope with poor outcomes.  If a business makes losses it becomes difficult to meet family needs and may lead to a reduction in the capital available to continue the business.  This effect is much more marked when borrowed capital is used to run the business.

This book shows people how to identify the main sources of risk to which they are exposed and how they can reduce that exposure, for example by adopting good husbandry practices or gathering market information to improve sales and prices.  Financial risks can be reduced by asking “what if..?” questions and assessing the effect of different yields and prices on a cash flow plan. 

The book goes on to explain the role of insurance in helping people overcome the effects of more devastating losses.  The language and principles of insurance are explained and examples of mutual and commercial schemes are described.  The final section introduces people to the idea of developing a risk management strategy and when insurance might form part of that strategy.  A checklist of questions to ask when considering an insurance policy is included at the end.

TAM 6: Explaining How to Use Financial Services

The final book in this series explains the important role that financial service providers play by providing individuals and businesses with opportunities to save and borrow, to smooth cash flows and make significant investments.   It also explains that most financial service providers are business people themselves, and they design and sell products with a view to making a profit.  Some service providers have been developed by groups of people to help themselves and are not profit oriented.  They range from small savings groups to large credit unions.

The main aim of this book is to enable people who have had no experience of formal financial service providers to understand how to use these organisations. For example, it explains what to expect inside a bank, how to open an account, what an ATM is, how a credit union differs from a bank and so on.  Using mobile phones to manage money and the role of microfinance institutions are also discussed. 

The next section reviews the different types of financial products that may be offered by financial institutions such as deposit accounts, current accounts and loans.  The importance of checking all the features and conditions relating to these products is emphasised, particularly how interest is calculated on a loan.  The final section highlights a number of security issues relating to financial services and emphasises the importance of debt management.