Wealth Generation comes next
The funds you allocate under this category are used to strengthen the weakest link in the business.You do this every year, and the net effect is to grow the entire business every year. What’s more, it is a compounding growth, and over a few years growth tends to become exponential.
Of course, the rate of growth is always constrained to a degree by the biological limitations of your ecosystem. Never-the-less, determined and focused decision-making towards your holisticgoal will see you move far more rapidly than your neighbours. Graphically, your allocation looks like the image below.
Identifying the Weak Link
Every enterprise in the business has a Weak Link. The best way to work out which enterprise should get the next available dollar of expenditure is to follow these steps:
For each enterprise, identify which link is the Weak Link. In the example below (Step 4) the Resource Link is the weak link in the cow/calf herd, whilst the Marketing Link is the weak link in the packaged beef business (the family have started direct marketing their product).
For each enterprise, calculate how much money you need to spend in order to address the weakness. In the example below, the cow/calf weak link, the steer fattening enterprise weak link, and the beef marketing weak link would each be addressed if the manager’s allocated $2,000 towards them.
Calculate the Dollar Return for the investment. Do this by thinking about the life of the investment. For example, if the Weak Link was the Resource Link, applying say $1,000 of fertiliser to a pasture will grow additional grass this year. Alternatively, spending the same $1,000 a different way - perhaps into some electric fencing, will also grow additional grass this year and in for years to come - the investment has an effect much longer than one year.
You must make some assessments as to what increase in output you will get per year from each alternative investment, and how long that effect will last. You can then calculate the total new income that will come into the business over time, as a result of the single expenditure you make.
Choose the enterprise that gives you the highest Marginal Reaction for the dollars invested and allocate money to it. In our example spending $2,000 on addressing the Weak Link of the Steer Fattening enterprise will return $15,000 over the life of the investment ie $7.50 returned per dollar invested.
If you still have money available, continue the process. Once money has been allocated to the Steer Fattening, the highest Marginal Reaction would be to allocate $2,000 to the breeding herd ($5.00 return per dollar invested, as opposed to $3:1 for the Beef Marketing, $2:1 for the Wheat, and $2.50:1 for the Canola)Every enterprise always has a Weak Link, and you can’t fix all of them, all of the time. You move forward most by addressing the one that will give you the greatest Marginal Reaction over time, for the dollar invested now.
Sometimes the highest Marginal Reaction is not even to spend money on the weakest link of an enterprise. Whilst the purpose of a business is to produce a profit, the reason it exists is to provide its people the Quality of Life they desire. Very often the greatest Marginal Reaction is from money directed towards ‘people’ things - a new kitchen, a tennis court, a family holiday, an education fund, etc.