Sustainable business growth - podcast transcription
Sustainable business growth
Greg: Welcome to Dairy News. I’m Greg Mills and today I have with me Tony Dowman. Tony, keeping a business growing is pretty critical so that we’re growing our asset base and we’re growing our profitability, but how do we make sure that that growth in our business is sustainable over the long term?
Tony: As you mentioned Greg, we do have to grow our businesses over time unfortunately because that’s the way the financial world with inflation. If you stayed at the same size and the same output for the rest of your life you’ll be left behind until you can no longer have the cash flow to service your financial needs. So the business needs to grow continually each year and these can be just small growths, but you eventually reach a point where there is required some capital investment into the business to keep the business profitable.
The real fear is that capital injection is not sustainable, that massive step or that massive growth you’ve done. What can happen is you can have a very small profitable business and keep in mind that the measure of profitability is the return on investment or the size of the profit in relationship to the value of the business. So you could start off with a very small profitable business, inject a lot of capital and expand the business. Now you have a very expensive business, but the income stream hasn’t kept pace with the value of the business.
So you’ve gone from a small profitable business to a large unprofitable business and that is a real fear of growth. So that’s why I talk about sustainable growth, that as you grow the business in value you must also grow the income side of the business and the profit side of the business proportionally. If you don’t do that fundamentally the business will fail because you’ll end up having an unprofitable business which is no longer servicing the needs of the owners.
Greg: What happens when you can’t see the scenario where you can expand sustainably? What are the options available to you then?
Tony: Well one of the options you’ve got is to no longer rely solely on the farm as your number one income stream. That there are points in time when you think "No longer will I invest in this particular farm." That maybe off-farm investment is the way to go, so you can grow your income stream through multiple lines of investment. The classic example is investing in property for argument’s sake, off-farm, that having rental properties off the farm which are totally independent to the farming business is maybe a better alternative for some people than pouring more and more money into the farm business to generate more and more cash flow.
Or another option is just to repeat the whole equation, the size of the farm over again. Buy a second farm and particularly if you’ve got children who are interested in becoming a farmer as part of their succession plan, is repeating the exercise of having two small profitable farms maybe a better option than one large unprofitable farm.
Greg: Thanks Tony. Thanks for that insight into sustainable growth in our business.
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