Is your business sustainable?
Posted on 07/21/2009 at 12:00 AM by Christa Hartsook
Blog entry written by Reg Clause, Iowa State University Extension,Value Added Agriculture Program coordinator
There is lots of talk about sustainability. When we evaluate a business model, trying to determine if it can be successful as an investment vehicle, we use a matrix of factors. Within this matrix is the question, "Is this business/market sustainable?"
This usually means things like, "Can this business withstand emerging competition?" or "Can the business throw off sufficient cash to serve the investors while renewing itself over time?" or "Will there be enough money to do research and development functions so that adjustments can be made to products or services as the market changes?" or "Will emerging trends on the regulatory front soon threaten the business model?" or "Is there enough cash or access to cash that the business can withstand interruptions or prolonged downturns?" or "Are there sufficient natural resources to continue?" or "Can sufficient inputs be continually accessed to support the plan?"
While these questions may seem aimed at a larger business than you are contemplating, these are appropriate to the smallest family operation reviewing a new enterprise or startup.
So, while sustainability seems to have been co-opted mainly by environmental factions or ideological politics, the practicality of this term as you can see above, is really about how broadly it cuts. The intellectual danger as terms become more trendy/convenient and less concise, is that we begin to ignore aspects that are equally important to the ones we might prefer to emphasize. The result is that those aspects which are ignored eventually and inevitably take on overwhelming importance.
A crude example. We might say we're going to do grass-based livestock, so we seed down the south farm to get started. Our goal is to market a "sustainable" and "healthy" form of beef. There is a mortgage on this farm and certain salaries would need to be paid, as well as real estate taxes. These costs exist even if nothing comes off the place so these are "overhead." Variable inputs would also be substantial and the first of these (seeding and prep) would be literally "sunk cost," which then becomes an overhead item as well. Additionally, the "opportunity cost" must be shown since the land could either be rented, sold or used in some other way. This analysis method is a way to reveal a "highest and best use" for this land.
The above example shows how sustainable in the market can be translated to sustainable in your financial situation.
In the final analysis, one must find sufficient markets and volumes to meet the financial requirements and exceed the returns to possible other uses for your time and resources. So, while we could be in the sustainable market with healthy product, it is conceivable that the business idea is unsustainable at a financial level if the burden is just too heavy for the business model to carry.
Terms like sustainability start to fuzz around the edges and we get comfortable with a notion that everyone agrees to a common definition. In fact, it is an appropriate aspect of determining feasibility and should be explored in the fullness of its meaning but within your specific circumstances.