Profit underpins good business
Meat & Livestock Australia April 26, 2024
A successful business could be described as one that provides sufficient profit for the needs of its owners and rewards them adequately for the capital and time invested in the business. What one producer considers an adequate return-on-time and capital may, however, be quite different to another’s impression of the same.
A more objective way to define a successful business is to look at what it needs to achieve in the long-term to be economically sustainable; that is, for income to exceed the cost of production so as to generate a return that meets or exceeds its cost of capital. This return-on-capital approach is a fundamental principle of capital investment.
Where return-on-capital is not a priority, such as where real estate values are over inflated from a primary production perspective, this could arguably be omitted where all of the following can be satisfied:
- Fund all current operating expenses and operational capital expenditure through internally generated working capital.
- Remunerate its owners adequately, at least to the standard of the average wage earner.
- Have the capacity to repay debt principal in a timely manner (suggested <10yrs).
- Maintain a ‘safe’ level of equity (suggested 85% equity or greater).
- Provide for the independent retirement of the existing owners. If the owners have been adequately remunerated through their working life (as per number 2), the business should not need to fund their retirement and this criteria is redundant. This point is also only valid if the business is to continue beyond the current generation and not be sold to fund retirement.
- Be able to survive business succession with the business and the family remaining intact. This point is only valid if the business is to continue beyond the current generation.
- Survive and prosper in the long-term without the erosion of environmental capital (environmental sustainability).